Advanced Micro Devices' (AMD -1.60%) first-quarter 2023 results sent investors scurrying for cover. Share prices of the chipmaker fell more than 9% on May 3 on news of a decline in its revenue and earnings, as well as terrible guidance that suggests that the company's fortunes won't improve any time soon.

A weak personal computer (PC) market and slowing data center momentum weighed on AMD's performance last quarter. The company's Q1 revenue was down 9% year over year to $5.35 billion, while adjusted earnings fell 47% to $0.60 per share thanks to a contraction in the company's margins. And the guidance for the current quarter indicates that things are about to get worse for AMD.

AMD is in the soup

AMD expects $5.3 billion in revenue this quarter, which would be a 20% drop over the prior-year period's revenue of $6.6 billion. What's surprising is that AMD sees a steeper decline in Q2 revenue despite claims that the PC market hit a bottom last quarter. The company points out that the gaming, client processor, and data center segments are on track to decline once again over the year-ago period.

AMD's poor results could give Nvidia (NVDA -1.11%) investors reason to worry, as both companies are dependent on the PC and the data center markets for a significant chunk of each company's revenues.

The data center business, for instance, produced nearly a fourth of AMD's revenue in the first quarter. The company reported lower sales of enterprise server processors in this segment, which explains why sales over here were flat compared to the prior-year period. More specifically, AMD saw higher-than-usual inventory levels at some data center customers during the quarter, which led to a drop in sales of its server processors.

Meanwhile, sales of central processing units (CPUs), which power laptops and desktops, fell a whopping 65% year over year, dragging AMD's revenue from the client processor business down to $739 million from $2.1 billion in the year-ago period.

Nvidia will release its fiscal 2024 first-quarter results (for the three months ending April 30, 2023) on May 24. AMD's woeful performance is a red flag for Nvidia investors, especially considering that the latter has been struggling in recent quarters and trades at an expensive 164 times earnings.

Are things about to get worse for Nvidia as well?

Nvidia's revenue in the fourth quarter of fiscal 2023 (which ended on Jan. 29) was down 21% year over year to $6 billion. The graphics specialist's non-GAAP earnings were also down by a third to $0.88 per share during the quarter.

The company's gaming revenue fell a massive 46% year over year to $1.8 billion as it had to contend with an oversupply of graphics cards amid a weak PC market. The professional visualization business, which includes sales of graphics cards for workstation PCs, also saw revenue drop an alarming 65% year over year to $226 million.

Given that these two segments produced a third of Nvidia's total revenue in the fourth quarter of fiscal 2023, it is not surprising to see that analysts expect a big decline in Nvidia's revenue and earnings in Q1 of fiscal 2024. Analysts anticipate Nvidia's revenue to drop 21% year over year to $6.5 billion, which is in line with the company's guidance. The company's earnings are expected to shrink to $0.91 per share from $1.36 per share in the year-ago period.

So any potential bad news from Nvidia on May 24 seems already priced into the tech stock. However, there is one major differentiator that could help Nvidia avoid AMD's fate and surprise Wall Street with a better-than-expected set of numbers: artificial intelligence (AI). While AMD is still working on a graphics processing unit (GPU) that will help it take advantage of the generative AI boom, Nvidia is making the most of this market.

AMD CEO Lisa Su pointed out on the company's latest earnings call that "customer interest has increased significantly for our next-generation Instinct MI300 GPUs for both AI training and inference of large language models." The chip is expected to hit the market later this year. Nvidia's GPUs, meanwhile, are already powering popular generative AI applications such as ChatGPT, and are being deployed by multiple customers.

As Nvidia controls more than 90% of the market for enterprise GPUs, which are used for generative AI applications, it could deliver better-than-expected results thanks to the booming demand for these chips. As it turns out, large language models require thousands of GPUs to train, and that could be Nvidia's trump card when the company releases its results this month. After all, 60% of Nvidia's total revenue came from selling data center chips in the last reported quarter, and there is evidence that there is healthy demand from this segment.

A closer look at Taiwan Semiconductor Manufacturing's latest results suggests that the demand for the foundry giant's 5-nanometer (nm) chips, on which Nvidia's enterprise GPUs are based, was solid last quarter. As such, Nvidia investors should consider holding on to the semiconductor stock going into its earnings report, as a stronger-than-expected showing could help it sustain its impressive momentum on the market.