We’re disappointed by AMD’s Q3 revenue warning but still believe in the stock long term

Advanced Micro Devices (AMD) pre-announced weaker-than-anticipated third-quarter revenue. The news came out after the closing bell Thursday and sent shares of the Club holding down sharply in extended trading. While a major disappointment, we’re taking solace in fact that the reason for the revised results was in the personal computer side of the business, where investors were well aware of the industry-wide troubles. AMD excepts revenue to be approximately $5.6 billion, below its prior outlook of $6.7 billion plus-or-minus $200 million. The primary driver of the shortfall was AMD’s Client segment, where sales were much lower than anticipated due to a weaker-than-expected personal computer market and significant inventory correction actions across the PC supply chain. The PC industry has been struggling all year because of all the demand that was pulled forward the past two years during Covid due to everyone being forced to work from home during the early days of lockdowns and building out their home offices. Despite the drop in revenue, it does appear that AMD’s gross margins are holding in OK. Gross margins in the third quarter are expected to be about 50%, below the roughly 54% management had previously guided to. The company will hold a conference call to discuss its full third quarter results on Nov. 1. On the bright side, the company said revenue from its other three segments — Data Center, Gaming, and Embedded — increased significantly year over year and were in line with company expectations. This was important to learn because it shows that cracks have not formed in AMD’s other businesses. It’s one area that is hurting AMD, and this is supportive of management’s shift to become a diversified semiconductor company and not just one that serves the PC industry. Still, the news is terrible as management had said on its second-quarter earnings call that they had taken a conservative approach to PCs for the rest of the year with their view of a mid-teens percentage decline this year. On one hand, AMD’s guide was supposed to appropriately de-risked the business even in the face of the messy commentary we had heard about the PC industry. For example, Micron Technology (MU) said as much last week on its earnings call. But on the other hand, some type of shortfall was to be expected because that’s how the stock traded in recent months. Before Thursday’s announcement, the pounding in AMD shares this year put the stock’s multiple at roughly 15x next 12-month earnings, and a multiple that low on a company with significant earnings power when the cycle is going its way means the earnings estimates were too high. So in some respect, it wasn’t a question of will AMD cut its numbers, it was a matter of how deep will the trough be? This is what investors in nearly every cyclical company are struggling to figure out right now, and it’s why it is hard to trust price-to-earnings multiples. If there’s any silver lining to be taken by Thursday’s pre-announcement, it is that this news will give the market some sense of what AMD can earn when revenues from one of the most cyclical parts of its business gets cut in half from the prior quarter. It doesn’t feel good to see AMD miss revenue by a little more than $1 billion and the stock trade down roughly 4% after-hours, but unfortunately these are the types of events that need to happen for a cyclical industry to bottom out. As for the stock, we are hesitant to buy this immediate dip because what we need to figure out is how long will the PC business hang around this trough. If it’s an issue that will persist for multiple quarters, then that calls for a little bit of patience because a better opportunity may present itself later. It’s also worth pointing out that all of our chip stocks were lower in after-hours trading. But Nvidia (NVDA), which has already lowered expectations around its gaming business, and Marvell Technology (MRVL), which is largely data center and has the least exposure to consumer end markets among its peers, were not down as much as AMD. Qualcomm (QCOM) was also dragged lower with the broader semiconductor sector, but its business is more smartphones than PCs. (Jim Cramer’s Charitable Trust is long AMD, NVDA, MRVL and QCOM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.