OpenAI has agreed to buy AMD AI accelerators; in exchange, AMD grants it warrants for about 10% of the company. Somehow, this will be accretive to AMD. Spanning five years, the deal calls for OpenAI to purchase 6 gigawatts of AMD-based hardware.
The first 1 GW tranche will deploy in the second half of next year and will include AMD’s upcoming MI450 AI accelerator (GPU/NPU). Future tranches will include the chipmaker’s Helios rack-scale systems based on a follow-on GPU. Purchases will either be made by OpenAI or its data-center partners.
Warrant Details
AMD is offering OpenAI warrants contingent on various factors. Warrants give the grantee the right—but not the obligation—to buy shares at a specified price, provided conditions are met. In this case, the strike price is one cent. The companies have withheld the conditions’ details, but they include deployment milestones and AMD stock-price targets. For OpenAI to claim the full 160 million shares, AMD’s stock must reach $600.
At that level, OpenAI’s holdings would be worth $96 billion. Until the company exercises the warrants, we expect AMD to account for them as a liability on its balance sheet. When they’re exercised, they’ll appear as an expense on AMD’s income statement. Note also that with warrants, the grantor must issue new stock, diluting existing shareholders.
How Will the Deal Be Accretive?
AMD claims the deal is accretive. Assuming the warrants are worth $400 per share on average (the midpoint between today’s price and the ultimate $600 bogey) when exercised, AMD will record expenses of $64 billion. Assuming the company maintains a 50% gross margin and holds operating expenses constant, it will have to sell more than $128 billion in GPUs and systems to OpenAI for the deal to be accretive. Provided it doesn’t liquidate its holdings as it exercises, OpenAI gets this AMD gear at a 75% discount.
Open Questions
Where will OpenAI find $128 billion? Because the company is generating billions in revenue but spending even more on R&D, it must raise money to cover the purchase price. The warrants could be collateral for a loan, and we expect the company to sell equity.
Another open question is how the 6 GW will be generated. That’s twice the power requirements of Los Angeles. The associated capital and operating costs, as well as pollution, are significant.
Bottom Line
AMD has joined the AI horse-trading frenzy. Nvidia recently committed to investing $100 billion in OpenAI, which in return will buy (or have its data-center suppliers buy) 10 GW of Nvidia products. OpenAI has concurrently committed to purchasing $300 billion of capacity from Oracle and a smaller amount from CoreWeave, which also has Nvidia ties.
Corporate deals involving warrants are common, but the AMD-OpenAI agreement is unusual. In this case, the smaller company and customer is receiving the warrants instead of the reverse, and the warrants are contingent on various factors. Because AMD must expense the warrants’ issuance, the company’s accretiveness claims will be tested. (By contrast, taking an equity stake in a customer only affects the balance sheet. A deal like the Nvidia-OpenAI one is structurally simpler and more likely to be accretive, at least on paper, if auditors and regulators don’t force the supplier/investor to charge the investment against revenue.)
We agree with AMD’s claim that the deal aligns interests. OpenAI can only exercise the warrants if it buys the GPUs and AMD’s share price rises. We also agree with the company that the deal validates its roadmap. OpenAI needs a hedge and counterbalance to Nvidia but wouldn’t strike this agreement if it harbored doubts about AMD. Yes, it’s agreeing to buy 10 GW of Nvidia’s products to AMD’s 6 GW, but securing 37.5% of the AI company’s business is a big win for AMD.