AMD AI Chip Deals Worry Shareholders
Advanced Micro Devices’ strategy of providing equity in its future success to significant AI clients OpenAI and Meta Platforms in return for substantial chip commitments is starting to create a notable impact on its profitability. In February, AMD reached an agreement to sell up to $60 billion in AI chips to Meta over a five-year period. This arrangement includes warrants that may enable the Facebook parent company to acquire up to 10% of the chip manufacturer, contingent upon the achievement of specific milestones. The deal followed a similar agreement with OpenAI last year, providing the startup the option to acquire up to approximately 10% of the chipmaker. On Tuesday, AMD announced a non-cash charge of $1.07 billion, equating to 66 cents per share, for the third quarter ending September 26, in order to account for these warrants, as shipments under the agreements start to increase.
The chipmaker projected a more rapid growth trajectory for 2027, driven by robust data-center sales, resulting in an 8% increase in its shares during after-hours trading and contributing to gains in the stocks of Intel, Nvidia, and Broadcom. The warrants represent an increasing trend among chip and AI cloud firms to utilise equity incentives in order to secure substantial, long-term commitments from a limited pool of AI clientele. This phenomenon underscores the interconnected dynamics of the AI boom, wherein companies function concurrently as customers, suppliers, and investors in each other. The strategy also poses a risk of diluting the interests of AMD shareholders. OpenAI and Meta may acquire a significant interest in the chipmaker for as little as a penny each, contingent upon the full vesting and exercise of the warrants, which could lead to a considerable increase in AMD’s share count. The ultimate value of the warrants is contingent upon AMD’s share price at the time of exercise.
OpenAI’s warrant incorporates thresholds related to AMD’s share price, whereas Meta’s warrant does not include such provisions. Analysts indicated that this development represents a significant endorsement of AMD’s AI chips and software; however, it is improbable that it will undermine Nvidia’s supremacy, given that the market leader is still able to sell every AI chip it produces. “While I do believe incentives played a role in some of their sales, I believe the bigger issue is that there is pent-up demand for a serious alternative to Nvidia and AMD’s products are now starting to compete on price/performance metrics,” analyst Bob O’Donnell said. AMD has also established a chip-purchase agreement with OpenAI competitor Anthropic, which entails a commitment from AMD to invest in Anthropic.
AMD’s finance chief, Jean Hu, indicated during Tuesday’s analyst call that the dilution of AMD shareholders would commence once OpenAI and Meta meet the vesting and exercise conditions, which encompass shipment and other commercial prerequisites. AMD anticipates offering additional guidance in 2027 regarding the timeline for when those conditions may be satisfied, she stated. Other AI chip and infrastructure firms have engaged in comparable equity-linked agreements with significant clients. Chip startup Cerebras has been granted warrants by OpenAI in connection with a $20 billion commitment, while Marvell has issued warrants to Alphabet’s Google, allowing the search giant the option to acquire a potential stake valued at $12.2 billion. Qualcomm granted Amazon warrants as part of a $60 billion agreement concerning its AI data-center chips.
