Advanced Micro Devices (AMD 0.32%) will badly miss its guidance for the third quarter as the PC market hits some serious turbulence after two years of pandemic-fueled growth. AMD had previously expected to report revenue of $6.7 billion, but now it sees the top line coming in at just $5.6 billion.

It's the PC-centric client segment that's to blame. A combination of lower end-market demand for PCs and dramatic inventory adjustments by manufacturers has greatly reduced the number of processors AMD is able to sell. Client segment revenue is now expected to decline 40% year over year in the third quarter.

Real growth has disappeared

An apparent silver lining from AMD's preliminary third-quarter results is that the company still expects total revenue to grow by 29% year over year. The data center and gaming businesses are still doing well, at least for now.

Unfortunately, this growth is a mirage. AMD completed its $49 billion all-stock acquisition of Xilinx in February, so the company's third-quarter results this year include a big chunk of revenue that was absent in the prior-year period. AMD didn't bother to include an organic revenue growth estimate with its preliminary results, which would exclude this acquisition-related revenue.

Thankfully for investors, it's easy enough to roughly back out Xilinx revenue. AMD doesn't disclose exactly how much Xilinx contributed, but Xilinx now represents the overwhelming majority of the embedded segment's revenue. AMD expects 1,549% year-over-year growth for that segment in third quarter, and you can safely assume that essentially all that growth is due to the inclusion of Xilinx. That tracks with how Xilinx was performing right before the acquisition was completed.

If you back out all the growth in the embedded segment, AMD's third-quarter organic revenue will actually be down slightly from the third quarter of 2021. You can add some error bars around this to account for the fact that it's not known exactly how much Xilinx contributed, but that doesn't really change the story. AMD is either not growing or barely growing once you exclude the impact of the acquisition.

Profits take a hit

Based on AMD's preliminary results, AMD is going to report a net loss under generally accepted accounting principles (GAAP) for the third quarter. The company expects a gross margin of just 42%, the result of weak demand and inventory write-downs, along with operating expenses of approximately $2.4 billion. To be fair, some of those expenses are noncash and related to the acquisition of Xilinx. It's a matter of opinion whether and how those should be counted.

AMD paid a high price for Xilinx, well over 10 times annual revenue. Given the rout in semiconductor stocks and the deteriorating demand environment, it's certainly possible that AMD will eventually need to write down some of the $50 billion of intangible assets sitting on its balance sheet related to that deal. If that happens, the argument that these acquisition-related expenses should be ignored goes out the window.

Things could get much worse

It doesn't look like the PC market is going to bounce back anytime soon, although once inventory adjustments are completed, the performance of AMD's client segment should better reflect actual end-market sales.

AMD's graphics segment will grow in the third quarter on a year-over-year basis, but that growth may not hold up if demand for graphics cards continues to soften. Another wrinkle: Intel recently launched its own graphics cards, and while they come with significant trade-offs, a third player is probably not good news for AMD.

The data center segment is still expected to grow by 45% year over year in the third quarter for AMD, the result of market share gains and persistently high demand. But the same inventory issues currently plaguing the PC industry could eventually hit the data center and cloud computing industries if AMD's data center customers start pulling back due to weakening demand. If global economies fall into recession, it's hard to imagine this kind of growth continuing for AMD.

AMD stock is now down more than 60% from its recent peak, but it's not particularly cheap. If the non-PC segments start to turn sour, this decline may be far from over.