AMD and OpenAI: A Game-Changing Partnership
Today marks a pivotal moment for AMD and its investors. The recent announcement of a long-term partnership between AMD and OpenAI has the potential to reshape AMD's valuation and future prospects. This article will analyze the details of this agreement and its implications for AMD shareholders.
The Breaking News: AMD and OpenAI Collaborate
AMD and OpenAI have announced a strategic partnership where AMD will deploy up to 6 Gigawatts of GPUs for OpenAI. This news has sent AMD's stock soaring, with intraday gains reaching as high as 30%. While a significant price increase often warrants caution, this partnership appears to fundamentally alter AMD's value proposition.
Details of the Agreement
OpenAI will purchase GPUs from AMD, totaling 6 Gigawatts of computing power. The initial deployment of 1 Gigawatt is expected to begin in the latter half of 2026. This differs significantly from OpenAI's previous agreement with Nvidia.
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AMD's Approach: Instead of OpenAI taking an equity stake in AMD, as was initially considered with Nvidia, AMD will issue new shares to allow OpenAI to acquire a stake in AMD.
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Long-Term Alignment: According to AMD's CEO, Lisa Su, this arrangement aims to ensure a long-term commitment and alignment between the two companies, as building and deploying such large-scale projects requires close collaboration.
Impact on AMD's Revenue and Valuation
The critical question is: How much revenue will this 6 Gigawatt deployment generate for AMD?
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Estimated Costs: Building a new data center and deploying one Gigawatt of computing power is estimated to cost $50 billion.
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GPU Revenue Share: Approximately 70% of these costs will be allocated to GPU vendors like AMD.
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Potential Revenue: Therefore, each Gigawatt of deployment can bring roughly $35 billion in revenue to AMD. Thus, the 6 Gigawatt deal has the potential to generate $210 billion in revenue.
Considering that AMD's total revenue last year was $25 billion, this deal could significantly increase AMD's revenue stream in the coming years.
New Valuation
To estimate AMD's future valuation, consider these factors:
- Projected Revenue Growth: Assuming AMD can maintain a 30% growth rate until the latter half of 2026, its revenue could reach $39 billion.
- Post-Deal Growth: After the deal takes effect in 2026, AMD's revenue could potentially grow by 50% over the next two years, reaching $90 billion by the latter half of 2028.
- Net Income: Assuming a 25% net income margin, AMD could generate $22.5 billion in net income by 2028.
- Price Target: Applying a 40x price-to-earnings (P/E) ratio, AMD's market capitalization could reach $900 billion.
- Share Dilution Consideration: If the share dilution is ignorable, AMD stock's price target in 2028 could be $556.
The Investor's Perspective
Based on these calculations, AMD's long-term investment potential remains high. Even after a 20% price increase, the new valuation suggests further upside.
Value investing focuses on buying good companies at reasonable prices. This strategy does not rely on predicting insider information but rather on assessing the fundamental value of a company.
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