On the surface, semiconductor designer AMD (NASDAQ:AMD) just had a horrible start to 2023. First quarter revenue was down 9% year-over-year to $5.35 billion, generating an operating loss of $145 million. In all, the results were in-line with management's outlook provided three months ago, but it wasn't a great look for a business trumpeting lots of long-term growth potential.  

Peeling back the headline numbers reveals a much better story, though, one driven by the advent of AI. Generative AI services like ChatGPT are getting all the headlines, sure, but AMD is gaining traction on lots of other fronts as intelligent computing picks up steam. Meanwhile, Intel (NASDAQ:INTC) revenue fell 36% year-over-year to $11.7 billion, generating an operating loss of $1.47 billion. This was near the top of management's guidance, but it was nonetheless an ugly quarter.

AMD stock is up an incredible 2,540% over the last decade, and Intel is up just 67% (when including reinvested dividends). Which chip stock is the better AI buy now?  

A strange semiconductor down cycle coming to an end?

Like any manufacturing industry, the semiconductor market is cyclical. Periods of growth are followed by soft patches in which sales will flatline or decline. One such down cycle cropped up the second half of 2022, particularly impacting PCs and smartphones as consumers and businesses scaled back their record early pandemic spending on work-from-home electronics. 

AMD and longtime rival Intel (NASDAQ:INTC) have been cutting shipments of chips to PC and laptop customers to help manage this downturn. As a result of this, AMD reported sales of $739 million in its "Client" segment (PC and laptop chips), a horrible 65% year-over-year decline. Intel reported a 38% year-over-year decline in its comparable segment, though PCs are far more important to Intel as it accounted for $5.8 billion in sales in Q1, or half of total revenue. AMD's PC and laptop segment only accounted for just 14% of total sales in Q1.

This has been a strange semiconductor market downturn, though. Usually, the various end-markets for chips (PCs and smartphones, data centers and enterprise computing, industrial markets like automotive, etc.) tend to move in closer lockstep with each other. This last year's cyclical slump has been very different, exacerbated by long-term effects from pandemic lockdowns. Even as PC and smartphone sales have plummeted, data center and enterprise computing has continued to soar, as have industrial computing needs. 

Cloud computing demand has been the reason, and generative AI services like ChatGPT (which are housed in the cloud, a remote data center accessed via an internet connection) have kept the party going. AMD's data center and AI segment, now headed by Victor Peng (who came to AMD from the Xilinx acquisition -- more on that in a moment), was essentially flat year-over-year with sales of $1.3 billion. No growth isn't all that impressive, until you compare it to Intel, which reported a 39% decline in data center and AI sales ($3.7 billion) in Q1 2023.

This strange disconnect between PC and data center demand appears to be coming to an end by the second half of 2023. Both "Client" and "Data Center and AI" segments are expected to begin increasing sequentially in the second quarter of 2023 compared to Q1 at AMD, followed by a stronger rebound in "Client" (again, read: PCs and laptops) the back half of 2023. Intel's PC sales should begin to pick up pace the second half of 2023, which is great news for those betting on a turnaround, but the picture is far less clear for its data center and AI segment.

Additionally, AMD's data center and AI sales are expected to grow in the second half of 2023 compared to the first half, thanks to new product launches like AMD's first-ever cloud-native Bergamo CPU and the Instinct MI300 data center accelerator used for AI workloads. All of this points toward full-year 2023 revenue growth for AMD's data center and embedded segments, which in total will account for over half of all revenue.

AI is more than just data center and cloud

It's easy to zoom in on financial results for data center sales, given that ChatGPT and the cloud computing boom it's helped to sustain are all the rage right now. But AI is far more pervasive than what is currently garnering public attention. As AMD CEO Lisa Su said on the earnings call, the world is "in the very early stages of the AI computing era, and the rate of adoption and growth is faster than any other technology in recent history."

That's why AMD bought Xilinx, a merger that was completed in February 2022. Following the acquisition, AMD organized a new business segment called "Embedded," which is now AMD's most profitable business unit (operating margin of 51% in Q1). Intel currently doesn't have a similar segment that's able to help pay the bills like that.  

Included in "Embedded" are chips and accompanying software for healthcare, manufacturing, mobile 4G and 5G networks, automotive technology, and the like. AI is proliferating throughout the global economy as organizations look for ways to get more operationally efficient, and AMD now has a broad portfolio of chip designs addressing all sorts of customer needs.

Embedded is expected to continue generating above-average profit margins for AMD, even as profitability within data centers and client computing rebound through the end of 2023. In short, AMD is an AI powerhouse with tons of growth potential in the next five to 10 years that lay ahead. 

Meanwhile, Intel has been slashing funding to a myriad of businesses so it can refocus on its core. Additionally, its accelerated computing segment -- accelerated computing chips being the key ingredient in AI -- was also tiny and bleeding cash. Intel "reorganized" it and now reports (as of 2023) within its other segments this year. Not a great look, especially as Nvidia (NASDAQ:NVDA) and AMD continue to charge ahead in this space.  

Of course, the current financials muddy the waters. But based on AMD and Intel's warming guidance for the balance of 2023, the stock's trade for 28 times and 78 times expected 2023 earnings, respecitvely. Great uncertainty still surrounds Intel for now, and shares trade for an elevated valuation -- assuming it generates a profit at all for full-year 2023. Much of that will depend on a rebound in PC and laptop sales.  

At AMD, data center and AI and its strong embedded segment led by the Xilinx acquisition could help business return to growth and robust profitability much more quickly. I thus think AMD remains a top buy in the semiconductor industry -- and for the new era of AI -- for investors looking to park some investment dollars for the long-term.