Intel Drags Down CPU Rivals. Is it a Buying Opportunity for AMD and Arm?

Intel's third-quarter earnings report caused a sharp decline in the semiconductor sector. The chip giant's stock plummeted 29%, leading the VanEck Semiconductor ETF to drop 7%. Intel's third-quarter results were positive, with revenue up 21% to $16.5 billion and adjusted earnings per share more than doubling. However, fourth-quarter guidance sent investors fleeing.

The company projected a sequential decline in revenue and a 600-point decrease in gross margins due to a slowdown in the PC market caused by memory shortages. Despite strong data center and foundry businesses, Intel's client computing segment, primarily composed of PCs, remains its largest revenue driver. Intel forecast revenue between $15 billion and $16 billion, significantly lower than the consensus estimate of $17.1 billion, and adjusted earnings per share of $0.25, compared to expectations of $0.44.

AMD and Arm also face exposure to the PC market, and all three stocks experienced significant declines following Intel's weak earnings. AMD lost 11%, while Arm fell 10%. However, the sell-off in AMD and Arm may be more sentiment-driven than indicative of the companies' underlying prospects. AMD has limited exposure to PCs compared to Intel, and its data center business is growing rapidly.

In the second quarter, data center revenue accounted for $6.7 billion out of $11.5 billion in revenue, while the client segment contributed $3.1 billion. AMD's data center segment saw 107% growth in the second quarter, likely continuing into the third quarter due to increased capital expenditures by hyperscalers. Arm has minimal PC market exposure but holds a dominant smartphone market share, where memory price challenges are similarly impacting the sector.

Arm does not break down revenue by segment, but data center royalties doubled year-over-year in its last quarter, indicating strong growth in that area.

AMD and Arm have seen substantial gains this year due to AI expectations, so the recent pullback following Intel's weak earnings is understandable. Both companies benefited from the AI rally, with Arm launching a new AGI CPU and AMD signing contracts with top hyperscalers in the data center sector. While there is still substantial potential for CPUs in agentic AI, high expectations have already been priced into these stocks.

Investors may want to wait for sentiment to stabilize before buying CPU stocks, particularly given the challenging earnings season for AI-related companies. The Motley Fool's premium services provide stock recommendations and portfolio guidance for those considering investing in these companies.