AMD Soars on OpenAI Deal. Is It Too Late to Buy the Stock?
News Summary
Advanced Micro Devices (AMD) stock surged earlier this week after the company announced a new partnership with OpenAI that could significantly boost its position in the artificial intelligence (AI) chip market. Under the deal, OpenAI will deploy 6 gigawatts of AMD's Instinct graphics processing units (GPUs) across multiple hardware generations, starting with a 1-gigawatt rollout of its MI450 chip in the second half of 2026. As part of the agreement, AMD granted OpenAI warrants for up to 160 million shares, which vest as specific deployment and share price milestones are met, with the final tranche tied to AMD's stock reaching $600 a share. AMD stated the deal would be immediately accretive and provides clear visibility to tens of billions of dollars in annual AI data center revenue starting in 2027. This arrangement is notable for its divergence from OpenAI's prior deal with Nvidia, where Nvidia invested in OpenAI. Here, OpenAI takes an equity stake in AMD, incentivizing it to help AMD's chips succeed and signaling OpenAI's strategic diversification from a single chip supplier. Despite risks like delayed revenue realization, OpenAI's financing and power infrastructure needs, and up to 10% dilution for existing shareholders, Morgan Stanley analysts estimate the partnership could lift AMD's 2027 adjusted earnings per share from $6.74 to closer to $10. While AMD's forward P/E ratio of 36x 2026 earnings estimates appears expensive, its PEG ratio of around 0.4 suggests it could be undervalued for the long term. For long-term investors, it's not too late to buy the stock, even after this rally.
Background
For years, Advanced Micro Devices (AMD) has been a distant second in the data center GPU market, largely due to the formidable moat Nvidia created with its CUDA software platform and entrenched ecosystem. While AMD's Instinct chips have steadily improved, overcoming Nvidia's software edge has proven challenging. OpenAI, a major builder of AI infrastructure, previously signed a deal with Nvidia and is also believed to have designed a custom chip with Broadcom for delivery next year. This partnership with AMD signifies OpenAI's strategic move to diversify its chip suppliers. The broader market is also anticipated to shift from primarily training large language models (LLMs) to more inference tasks, an area where Nvidia's CUDA moat is considered less dominant.
In-Depth AI Insights
What is the deeper strategic significance of OpenAI opting for equity incentives rather than direct investment from AMD? - OpenAI's choice to take an equity stake in AMD, instead of AMD investing in OpenAI, represents a more proactive strategic maneuver aimed at securing supply chain diversification and resilience. In the current climate of intensifying global tech competition and supply chain uncertainties, over-reliance on a single vendor (like Nvidia) presents significant operational risks and negotiating disadvantages. - By holding AMD shares, OpenAI directly incentivizes AMD to optimize its Instinct chips and associated software ecosystem, aligning them closely with OpenAI's requirements, thereby fostering a robust alternative competitor in the increasingly vital AI chip market. - This model also effectively lowers OpenAI's long-term hardware acquisition costs while ensuring a stable and continuous supply of critical AI infrastructure, which is paramount for its future AI model development and deployment. How can AMD effectively translate its