What happened

Shares of leading chip stocks were tumbling today after Advanced Micro Devices (AMD -0.29%) confirmed what investors had been fearing: a severe downturn in PC demand. AMD won't release fiscal third-quarter results until November, but it announced preliminary revenue of approximately $5.6 billion for the quarter, missing management's forecast for $6.7 billion.  

As a result, investors hit the sell button on chip stocks, sending shares of Advanced Micro Devices down by 10.9%, Nvidia (NVDA 0.35%) by 6.8%, and Intel (INTC) by 4% as of 12:40 p.m. ET.

This caps off a rough year for AMD, with its stock price already lower by 50% year to date, despite still being on pace to report strong full-year revenue growth.

So what

AMD was the last domino to fall. Intel and Nvidia had already reported weakening revenue growth in the last quarter -- a sign of how bad things are getting across the semiconductor industry. Nvidia had started to see its gaming segment decelerate as early as Q1 of this year. AMD's revenue increased by at least 70% year over year in the first two quarters of the year, but that momentum is apparently over for now.  

On a positive note, AMD said that revenue across data center, gaming, and embedded segments each grew "significantly year over year," consistent with expectations. This means AMD is still running circles around Intel in the consumer and enterprise central processing unit (CPU) market. Even with the revised figure for the upcoming earnings report, AMD's revenue will still be up 29% year over year, which is much better than Intel.

Intel saw revenue fall 22% year over year in the last quarter, citing the weakening demand in the PC market and economy overall. But execution issues appear to be Chipzilla's biggest problem. The company is spending billions of dollars to speed up innovation and expand domestic manufacturing capacity to regain control of the supply chain and market leadership. Intel's capital expenditures were up 56% in the first half of the year, which is pressuring profitability just as PC shipments are starting to plunge. 

Both AMD and Nvidia have reported strong growth in their respective data center segments this year, but investors are starting to get nervous. Some analysts fear that the accelerating decline in PC shipments will eventually spill over to the enterprise market. Nvidia's data center revenue growth decelerated from 83% in Q1 to 61% in Q2, which is not the trend investors want to see.  

Now what

Investors might want to wait for the dust to settle before rushing to buy any of these beaten-down growth stocks. However, if you have a long-term perspective, it's easy to make the case that AMD is being significantly undervalued at a price-to-earnings (P/E) ratio of 14.6. Its record of superior growth makes AMD a better buy next to Intel, which has struggled to keep up and is not that much cheaper, trading at a P/E of 11.5.

INTC PE Ratio (Forward) Chart

Data by YCharts

Still, investors should watch the chip battle in the near term. Intel appears to be ready to fight back aggressively against its smaller rival. AMD's new Ryzen 7000 series CPUs for desktop could face stiff competition against Intel's upcoming Raptor Lake release, which offers comparable performance at a lower price point. Intel is also aggressively pricing its new Arc A750 and A770 graphics cards, which could take a small bite out of Nvidia's lower-end market. 

Nvidia is more expensive trading at 36 times expected earnings. Team Green is experiencing a similar decline in revenue as AMD. Nvidia just released its new RTX 40 series graphics chips for gaming, which some investors are hopeful can turn things around next year. Nvidia expects revenue of about $5.9 billion for the fiscal third quarter, down from $7.1 billion in the same period a year ago.  

While Intel tries to recover, AMD and Nvidia are executing against massive long-term growth opportunities in advanced AI-based computing applications and software. These companies are not done growing, so investors could have a rare opportunity to buy these stocks at incredibly cheap valuations.