Advanced Micro Devices (AMD -0.29%) reported third-quarter earnings results after the market closed Tuesday, delivering top- and bottom-line performance that fell short of expectations. The semiconductor company also issued guidance that fell short of the average analyst target, but there were some bright spots in some key business segments -- and the stock moved higher in after-hours trading.

While AMD is facing relatively weak demand for PC central processing units (CPUs), the market appears to be bullish on guidance for sequential sales growth in the fourth quarter for the company's data center and embedded business segments. Is the stock a buy on the heels of the recently released third-quarter results and outlook?

A chip rising from a circuit board.

Image source: Getty Images.

Weak PC CPU demand led to underperformance in Q3

AMD released preliminary Q3 results on Oct. 6, and actual Q3 results came in roughly in line with those estimates. Revenue rose roughly 29% year over year to reach $5.565 billion, which was a bit lower than the approximately $5.6 billion in sales targeted in the preliminary report and far below the company's initial guidance for growth of roughly 55% year over year. The semiconductor specialist's revenue also fell short of the average Wall Street analyst estimate for revenue of $5.65 billion, and non-GAAP (adjusted) earnings of $0.67 per share in the period fell short of the average analyst target's call for per-share earnings of $0.69.

Sales for the quarter missed the company's initial guidance due to weaker-than-expected performance for the client segment, which consists of PC CPU products. In addition to softer-than-anticipated unit sales, AMD saw a lower-than-expected average selling price for CPUs in the quarter and $160 million in adverse charges for inventory, pricing, and related reserves in the graphics and client businesses.

Revenue for the company's client segment tumbled 40% year over year to $1 billion amid softer demand and pricing weakness. On the other hand, revenue from the company's data center, gaming, and embedded segments saw strong year-over-year growth and were roughly in line with the guidance management issued when it published second-quarter results back in July. While the company's overall Q3 performance came in a bit weaker than anticipated, performance outside the client segment looked encouraging.

Bright spots in other segments

AMD's CPUs have been gaining market share from Intel in the PC and server markets. While demand in the PC category has been softening lately, customers have continued to spend big on processors and chips for data centers. Third-quarter revenue for the data center segment jumped 45% year over year to reach roughly $1.6 billion, and segment operating income rose 64% to reach $505 million.

Revenue for AMD's embedded segment reached $1.3 billion in the quarter, up from approximately $100 million in sales in the prior-year quarter. The big jump was driven by the integration of Xilinx, a designer of field-programmable gate arrays (FPGAs) and other programmable chips that AMD acquired earlier this year in a $49 billion deal. Xilinx is arguably the world's leading creator of FPGA chips, which can be programmed for different applications and have emerged as important components for data centers, artificial intelligence, and 5G communications networks. 

Meanwhile, revenue for the company's gaming segment rose 14% year over year to reach $1.6 billion. Chip sales for gaming consoles made significant gains compared to the prior-year period, but graphics processing unit (GPU) sales were down -- likely due to reduced mining demand stemming from the cryptocurrency bear market.

Crucially, management expects revenue for the data center and embedded segments to increase on a sequential basis in Q4. Both units are relatively high-margin and already posted strong performance in Q3. Guidance for continued sales growth in the current quarter is encouraging, but AMD's sales growth outlook still looks considerably weaker than it did in July.

Prior to the recent Q3 earnings release, the average analyst estimate had guided for Q4 revenue of $5.95 billion, but AMD now expects sales to come in between $5.2 billion and $5.8 billion for the period. The company's full-year guidance now calls for sales between $20.5 billion and $26.5 billion, representing annual growth of roughly 43%. The previous midpoint target had called for sales of $26.3 billion.

Is AMD stock a buy?

AMD stock has fallen 60% in 2022 so far and is down approximately 63% from the lifetime high that it reached last November. At the same time, the stock has also gained roughly 71% over the last three years, and there are still some significant risk factors on the horizon.

Given the softness in the PC CPU market, AMD's performance could be uneven in the near term. While the demand outlook for the company's data center and embedded segments is promising, it's possible that continued macroeconomic headwinds will lead to weaker business performance overall or otherwise spur continued sell-offs for the stock.

For investors seeking exposure to the semiconductor space, AMD shares look non-prohibitively valued, trading at roughly 16.5 times this year's expected earnings, and I think the stock is a worthwhile buy at current prices. On the other hand, the company's outlook doesn't appear to have improved much with its recent quarterly release, and it's possible that Wall Street's bullish reaction is largely a result of expecting worse results.