Here's what AMD's Lisa Su told Cramer after the chipmaker issued light guidance

Published Wed, Aug 3 20226:30 PM EDT

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

We admittedly hoped for a little more out of Advance Micro Devices ' (AMD) latest quarterly results and current-quarter guidance, but Tuesday night's report did not shake our investment thesis. In an interview Wednesday with Jim Cramer, AMD CEO Lisa Su helped solidify our view that the chip designer's weaker-than-expected third-quarter forecast is not cause for long-term concern. Here is what Su had to say about the company's PC sales, the data center market and more. 1. Softness in consumer sales While AMD maintained its full-year sales guidance, its expectations for $6.7 billion, plus or minus $200 million, in third-quarter revenue came in below Wall Street's projections of $6.8 billion. The slowdown in PC sales is a major factor in the narrow miss. AMD now sees year-over-year PC sales declining in the mid-teens on a percentage basis, compared with prior expectations of a high-single digit dip. Another factor weighing on AMD is softness in gaming GPUs, the graphics cards that go into video game-focused computers, even as demand for AMD's console SoCs (system-on-a-chip) — think Xbox and PlayStation — holds up well. Taken together, the conclusion is AMD's consumer end markets are weakening due to worsening macroeconomic conditions (although that's something we've known and flagged to members for months ). The parts of its business geared toward enterprise customers, meanwhile, are still in good shape, enabling AMD to leave its full-year forecast unchanged. Under Su's leadership, AMD has been working to diversify its revenue streams and gain footing in more lucrative markets like the data center. The CEO told Cramer on Wednesday that additional progress on that longer-term transformation — a key reason we're invested in AMD — is ahead. "If you think three or four years ago what used to be 85% exposed to consumer, today we're about 40-plus-percent data center and embedded, and by the time we go the next couple of years, you're going to see the data center and embedded be the largest part of our business, and we like that because that's selling to large customers, really businesses, cloud, manufacturers. What we're working on is the three-year roadmap and what do they need — not just this year — but what do they really need over the next few years?" 2. Embedded sales, Xilinx acquisition When Su refers to "embedded" sales above, she's talking about various semiconductors that are used by a host of industries including aerospace, automotive and telecommunications. AMD now reports these sales in their own category, due in part to the fact the company's exposure to these end markets grew significantly after completing its blockbuster acquisition of Xilinx earlier this year. How much did that exposure grow? Now with Xilinx's revenue included, AMD's second-quarter embedded sales surged 2,228% year over year to $1.3 billion. That's roughly 20% of the company's second-quarter revenue. AMD expects continued strength in its embedded segment, citing it, along with data center, as the primary drivers of revenue growth in the third and fourth quarters of this year. We believed the acquisition was accretive at the time, but Su explained to Cramer in more detail just how beneficial the Xilinx deal has been so far: "Very pleased with the performance of the Xilinx business. First of all ... it was a great business all along. They had great exposure to important markets, and what we've seen is they were actually quite supply constrained last year into early this year. We have been able to accelerate that with more supply with the larger supply base that we have. What I can say is they are everywhere, so it's nice to see. When you look at markets that traditionally are not AMD markets — things like aerospace and defense, industrial and test and communications, you know 5G is ramping in the second half — those are things that add capability and more overall resiliency to the AMD business." 3. Data center Buying Xilinx did not just expand the range of industries where AMD has sizable exposure. It also bolstered the company's data-center business, an area where Xilinx has delivered innovations such as its adaptive compute acceleration platform (ACAP ) in recent years. In the second quarter, AMD's newly established data-center segment saw revenues jump 83% year over year to $1.5 billion, with the company noting strong sales of its EPYC server processors. AMD also continues to take share in the data-center market, Su noted on the conference call, at a time when rival Intel (INTC) is struggling with execution problems. In the Wall Street analyst reaction notes to AMD's quarter that we read, market share gains were a common theme. For example, analysts at JPMorgan raised their year-end estimates on AMD's slice of overall x86 server revenue to between roughly 21% and 23%. Previously, the firm expected AMD's revenue share to be 19% to 20%. Similarly, Bernstein's Stacy Rasgon wrote in a note to clients that market share took a huge swing in AMD's direction particularly in server (the part that really matters)." The analyst also said, "mathematically AMD picked up more than 6 points of data-center revenue share [quarter over quarter], and more than doubled it [year over year], reaching close to a quarter of the overall market." Of course, at the Club, we look for both a strong track record of past performance and signs that it will continue in the future. Su had positive things to say in that regard, specifically regarding the upcoming rollout of its new data-center chip codenamed "Genoa." The general purpose server chip uses 5-nanometer technology, which helps deliver more processing power than its current offering that built on the 7-nanometer process. "We're pushing the envelope on technology. As much as we love our current chips which are in 7-nanometer ... our next big thing is Genoa. Genoa launches late this year. It's in 5-nanometer technology. It has a lot more performance and capability and that's what large data center and cloud players need. That's what we've been working on. We're very much about meeting and executing to our roadmaps, and that's so important to our largest customers." (Jim Cramer's Charitable Trust is long AMD. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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Lisa Su, CEO, AMD