OpenAI acquires chips, AMD gains market, and ultimately investors "foot the bill"?

AMD and OpenAI announced on Monday the expansion of their partnership, with a multi-billion dollar chip procurement agreement that employs an unusual payment method: OpenAI will use AMD's own stock to pay for the costs. This unique financing arrangement essentially allows AMD to finance large purchases for its customers, with the ultimate cost potentially borne by investors who drive up the stock price.

According to the agreement, OpenAI will assist AMD in refining its Instinct GPU product line to compete with NVIDIA, and will procure and deploy 6 gigawatts of AMD computing power over several years. AMD granted OpenAI warrants for up to 160 million shares of stock, which will vest in batches based on specific milestones, with the final batch requiring AMD's stock price to reach $600 to be exercised.

AMD's stock price was around $165 before the announcement and soared to $211 by the close on Tuesday. UBS analyst Timothy Arcuri noted that if OpenAI holds all the shares until the end of the agreement, the value of its holdings could reach approximately $100 billion.

This arrangement provides AMD with a significant opportunity to enter the wave of large AI data center construction, with an expected market share of up to 30%, while also gaining important validation for its AI GPU products from OpenAI.

Mechanism of Stock Financing Model

The stock warrants granted by AMD to OpenAI will vest in batches, each linked to specific stock price targets. The final sixth batch of warrants requires AMD's market capitalization to reach approximately $1 trillion to be exercised. According to UBS analyst Timothy Arcuri, if OpenAI holds the stock until the end of the agreement, the value of its holdings would be about $100 billion.

However, Arcuri believes that a more likely scenario is that OpenAI will sell AMD stock during the process to pay its AMD bills. This essentially serves as a financing solution for AMD to provide procurement for its customers.

The core logic of this arrangement is that AMD provides financing for OpenAI's large chip purchases using equity rather than cash, allowing OpenAI to acquire the necessary computing power at a lower upfront cost.

Market Validation Value Exceeds Financing Costs

Although this financing arrangement may be "arguably less attractive than NVIDIA's deal" for AMD, Arcuri believes that obtaining OpenAI's validation of AMD's AI GPU capabilities is sufficient for AMD to take on this financing risk.

OpenAI's endorsement proves that AMD's AI GPUs can handle OpenAI's workloads, and thus can manage any other AI workloads. AMD emphasizes that it is also in discussions with other customers besides OpenAI, and expects this agreement to ultimately accelerate AMD's adoption momentum.

In particular, OpenAI's endorsement provides AMD with opportunities to sell GPUs to numerous cloud service providers to whom it has already supplied CPUs. This market validation effect could snowball into other customers.

Investors Ultimately Bear the Costs

In the long run, the real buyers of AMD GPUs for OpenAI's large-scale purchases over the years will be retail and institutional investors—if they indeed drive up the stock price.

This model contrasts with NVIDIA's investment in OpenAI. The $100 billion investment announced by NVIDIA last month also provides financing for OpenAI to purchase NVIDIA products to some extent, but the difference is that NVIDIA's multiple investments have allowed it to acquire stakes in rapidly growing AI providers, rather than the other way around.

For AMD, this financially engineered deal allows OpenAI to incur almost no costs, enabling AMD to gain a significant foothold in the wave of next-generation data center construction on a global scale—expected to capture a market share of up to 30%