By Arsheeya Bajwa and Max A. Cherney

(Reuters) -Advanced Micro Devices forecast AI chip sales on Tuesday that failed to impress investors, knocking its stock down about 7% in extended trade.

Chief Executive Officer Lisa Su told analysts on a conference call that AMD (NASDAQ:) expects AI chip sales of roughly $4 billion for 2024, an increase of $500 million from its prior estimate for the year.

The increase of a half billion dollars was not enough to meet Wall Street's lofty expectations for AI chips. Nvidia (NASDAQ:) has consistently crushed investor expectations because of soaring AI chip sales.

"I think investors wanted to see a stronger demand pipeline from AI-related products, but it is a slower ramp for them against Nvidia and perhaps they aren't making as much progress as the street hopes," Ben Bajarin, CEO of consulting firm Creative Strategies, said.

Enterprises rushing to adopt generative AI have prioritized spending on AI server chips, hitting demand for traditional server semiconductors, which constitute a large portion of AMD's revenue. These processors cannot effectively handle the complex tasks associated with AI.

"Overall AI demand has exceeded anyone's expectations in 2024," Su said in the conference call.

While some of AMD's central processors (CPUs) are used in conjunction with AI chips, the ratio is skewed in favor of more advanced AI processors versus CPUs. AMD trails front-runner Nvidia, which has about 80% of the booming market for artificial intelligence server semiconductors.

Nvidia shares fell 2.3% in extended trading.

On an adjusted basis, AMD forecast gross margin of about 53% for the second quarter, just beating the estimate of 52.9%.

Revenue at its data center business jumped 80% to $2.3 billion. Analysts had expected revenue growth from AMD's MI300 series of AI processors to offset weakness in the traditional server market.

Uncertain demand from the gaming market has further hurt AMD. Personal computing and console gaming revenue growth is expected to remain below pre-pandemic levels through 2026, according to research firm Newzoo.

Gaming revenue fell 48% to $922 million. The company had forecast significant double-digit percentage declines in this segment as revenue from the chips it designs for gaming consoles such as Microsoft (NASDAQ:)'s Xbox and the (NYSE:) PlayStation 5 has already hit its peak.

This year marks the fifth year since the most recent generation of gaming consoles has been released, CFO Jean Hu had said in January. AMD's videogame console revenue peaks after roughly four years.

Revenue from the embedded segment fell 46% to $846 million compared with the year-ago quarter. The company had said in January demand for the segment will remain soft through the first half of the year. Ongoing inventory corrections have hit revenue from this segment as clients clear out a build-up of chips.

The company forecast revenue of about $5.70 billion, plus or minus $300 million, for the second quarter, in line with analysts' average estimate, according to LSEG data.

AMD reported revenue of $5.47 billion for the first quarter, compared to analysts' average estimate of $5.46 billion. AMD reported per-share earnings of 62 cents, adjusted for stock-based compensation, among other items. Analysts expected adjusted earnings of 61 cents a share.