AMD books $1B charge tied to OpenAI, Meta deals
What's the story
Advanced Micro Devices (AMD) is witnessing a major impact on its profits due to its strategy of giving away stakes in its future success. The company has made this move to get big chip commitments from major artificial intelligence (AI) customers like OpenAI and Meta Platforms. In February, AMD had agreed to sell up to $60 billion worth of AI chips to Meta over five years.
Strategic partnerships
AMD's deals with Meta and OpenAI
The deal with Meta gave the social media giant warrants to buy as much as 10% of AMD if certain milestones are met.
This was not the first such agreement for AMD, as it had made a similar deal with OpenAI last year.
The AI start-up was also given the option to purchase up to roughly 10% of the chipmaker under this arrangement.
Financial impact
AMD's financial forecast and stock performance
On Tuesday, AMD reported a non-cash charge of $1.07 billion, or 66 cents per share, for the third quarter ending September 26.
The charge was attributed to the warrants as shipments under these agreements begin to ramp up.
Despite this financial hit, AMD has forecast faster-than-expected growth in 2027 due to surging data center sales.
This optimistic outlook sent its shares up by 8% in extended trading hours.
Market strategy
Equity incentive trend in the chip and AI cloud industry
The warrants are part of a growing trend among chip and AI cloud companies to use equity incentives to secure big, long-term purchases from select AI customers.
However, this strategy also poses a risk of diluting AMD shareholders.
If the warrants fully vest and are exercised, OpenAI and Meta could own a significant stake in the chipmaker for as little as a penny each.
Market response
Shareholder dilution concerns and industry-wide implications
AMD's finance chief Jean Hu said on Tuesday's analyst call that the warrants would start diluting AMD shareholders once OpenAI and Meta meet the vesting and exercise conditions. These include shipment and other commercial requirements.
The company expects to provide more guidance in 2027 on when those conditions could be met.
Other AI chip companies have also entered similar equity-linked deals with major customers, further highlighting this industry trend.