AMD and OpenAI: How Chip Sales Will Fund OpenAI's Growth - Wall Street Analysis

AMD and OpenAI’s Unique Partnership Agreement

Following the announcement of an expanded collaboration between AMD and OpenAI on Monday, discussion quickly focused on the unconventional payment method OpenAI will employ for its AMD acquisitions. The company will utilize AMD’s own stock as a form of payment.

Details of the Collaboration

OpenAI has committed to assisting AMD in the refinement of its Instinct GPUs, which are designed to compete with Nvidia’s offerings. Furthermore, OpenAI intends to procure and deploy 6 gigawatts of computing power from AMD over several years. AMD projects this agreement will generate billions in revenue.

The Stock-Based Payment Structure

However, OpenAI will not be funding these purchases through its existing revenue streams. Instead, AMD has issued OpenAI a substantial number of stock warrants – potentially up to 160 million AMD shares. These warrants will become exercisable in stages as pre-defined milestones are met.

These milestones are tied to specific increases in AMD’s stock price, with the final tranche contingent upon AMD shares reaching a value of $600 each, as AMD disclosed. Prior to the announcement, shares were trading around $165, but subsequently rose to $214 by Monday’s market close.

Potential Financial Implications

Should the stock price achieve these targets, and OpenAI fulfill its obligations, the value of the AMD stock held by OpenAI could potentially cover the cost of the GPUs. Analysts estimate the stock could be worth approximately $100 billion.

“We would note that the final 6th tranche requires ~$1T market cap to vest – ergo, if OAI were to hold stock until the end of the deal, its stake would be worth ~$100B,” noted UBS analyst Timothy Arcuri in a research report released Tuesday.

A Financing Mechanism for AMD

Arcuri suggests a more probable scenario involves OpenAI selling its AMD stock progressively to finance its purchases. Essentially, this arrangement functions as a financing mechanism for AMD, allowing it to fund this customer’s acquisitions.

Strategic Value for AMD

Despite this, Arcuri contends that the validation of AMD’s AI GPUs’ capability to handle OpenAI workloads – and, by extension, any AI workload – is a significant benefit for AMD, justifying this financing strategy. AMD has indicated ongoing discussions with other potential customers and anticipates this agreement will accelerate the adoption of its products.

OpenAI’s endorsement provides AMD with an opportunity to market its GPUs to the numerous cloud service providers it currently supplies with CPUs.

The Role of Investors

Ultimately, retail and institutional investors may be the ones financing OpenAI’s substantial, multi-year purchase of AMD GPUs if they drive the stock price upward.

Comparison to Nvidia’s Approach

Nvidia is also effectively financing OpenAI’s purchases of its hardware through its own $100 billion investment announced last month. However, Nvidia’s investments have resulted in Nvidia acquiring a stake in OpenAI, whereas the reverse is true in the AMD-OpenAI arrangement.

AMD’s Strategic Imperative

What alternatives did AMD have? By structuring a deal that minimizes OpenAI’s upfront costs, AMD secures a substantial foothold – estimated by USB at up to 30% market share – in one of the largest expansions of next-generation data centers globally.

Long-Term Benefits for AMD

Arcuri concedes that AMD’s deal is “arguably less attractive” than Nvidia’s, but emphasizes that it represents a significant validation of AMD’s product roadmap and could lead to further customer acquisitions.