This multi-year deal with see OpenAI use AMD’s chips in its datacentres and is expected to generate tens of billions of dollars in revenue for AMD.
As part of the deal, OpenAI could end up owning a stake of around 10% in AMD as certain milestones are hit.
The shares rose 36% in pre-market trading.
Our view
AMD has scored a breakthrough with OpenAI, showing its next-generation chips (due next year) are a viable option, at scale, for AI’s biggest names. Having OpenAI as a first mega customer could open the door for others, and CEO Lisa Su sees the multi-year revenue opportunity topping $100 billion.
AMD designs high-performance computer chips for laptops, game consoles, and data centres. The data centre space holds the key to future growth. New and more advanced chips are coming online, and there’s now a strong order book from OpenAI and a prior deal with Oracle that act as solid proof points that AMD’s new chips are the real deal.
But there’s more than just the chips these days, with networking and software to consider too, areas in which Nvidia still has an edge. AMD is also relatively unproven at this scale, but clearly the market is expected to be large enough for AMD to capture demand as a strong alternative option.
Expectations are high, and research costs are ramping up to try and deliver an attractive AI product. This is a necessary use of cash, but margins are already lower for AI chips, so we’ll be keeping an eye on how this evolves as AI products become a larger part of the mix.
China is important, too, and AMD took an $800mn hit last quarter as export restrictions remained in place. That’s in part why growth from the data centre business was underwhelming. Licenses are expected to be approved, but AMD’s roadmap for getting these agreed upon and ramping production sounds a little uncertain.
AI demand is likely to be a key driver of growth, and the area investors are most focused on. But AMD still has a large exposure to the PC and gaming markets, where performance has been encouraging.
In PC land, AMD has been grabbing market share from key rival Intel, and the market has been performing well after a torrid time. But we are a little cautious about the impact of a tariff-related pull-forward in demand that could unwind over the coming quarters – an area to watch.
AMD is on the right track to capitalise on the growing demand for AI compute, and it’s taking the right steps to take a meaningful position in the market. But there’s a lot to execute on, and buyer concentration in the data centre space is a risk. With that in mind, and shares meaningfully higher off the back of the OpenAI deal, we think a lot of the upside potential is already built in.
AMD key facts
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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