Yesterday (6 October), news broke about a new deal struck between OpenAI and Advanced Micro Devices (NASDAQ:AMD), or AMD as it’s known. AMD stock closed almost 24% higher on the day, hitting fresh 52-week highs in the process. Even though this is a large move, I think it bodes well for further gains in the long term. Here’s why.
Details of the deal
AMD and OpenAI just announced a multi-year, multi-generation strategic partnership in which AMD will supply AI chips (GPUs) to OpenAI. In terms of size, OpenAI will deploy up to six gigawatts of AMD’s Instinct GPUs over several years. The initial deployment is set to start next year.
As part of the agreement, AMD has issued warrants to OpenAI for up to 160m shares, which is about 10% of AMD. These warrants vest based on deployment milestones and AMD’s share price performance.
Although projections for the financial benefit are not easy to gauge, AMD expects the deal to generate tens of billions in annual revenue. Over the course of the next four years, it expects it to come close to $100bn in new revenue.
Why it’s great for AMD
I feel there are many reasons why this is good for the company in the long run. To begin with, the revenue opportunity is huge and comes as a key way of validating the business going forward.
Until now, Nvidia has dominated AI infrastructure. This deal helps AMD diversify its customer base, gain credibility, and show that it can compete at scale in AI.
The use of stock warrants is interesting too. OpenAI gets the option to acquire up to 10% of AMD via these warrants, so it has skin in the game. That ensures it’s more likely to use AMD’s tech over time, which helps AMD with sustained demand. Further, the details of the warrants linked to stock performance mean AMD management will want the share price to increase as well. I only see this as a positive for other investors.
Finally, the size of the initial stock move yesterday is another sign of how well people are taking the partnership. OpenAI is the most valuable private company in the world, so getting closer to it should help AMD to ride higher as both companies grow.
Pause for thought
Despite the optimism, there are still risks. The jump in the stock means the price-to-earnings ratio for AMD is an eye-watering 117. This is very high and so could mean the stock is currently overvalued and at risk of a sharp fall if results disappoint.
In terms of the deal, delivering this amount of gigawatt infrastructure is hard. There are many factors involved that could delay or reduce expected revenue based on the rollout plans.
But even though it’s wise for investors to keep a level head with such deals, I still think it’s a stock with growth potential that they can consider.
