When AMD and OpenAI announced their expanded partnership on Monday, the conversation quickly turned to the unusual way OpenAI paid for AMD’s acquisition. AMD’s own stock will be used for this purpose.
In summary, OpenAI has agreed to buy and deploy 6 gigawatts of compute power from AMD over a multi-year period while helping AMD improve its line of competitive Instinct GPUs from Nvidia. AMD said the deal represents billions of dollars in revenue.
However, OpenAI does not pay for this out of its own revenue. In return, AMD will grant OpenAI a large amount of stock acquisition rights (up to 160 million AMD shares), which will be awarded in multiple installments upon the achievement of certain milestones. These milestones include a tangible increase in the stock price, with the final tranche relying on AMD stock soaring to $600 per share, AMD revealed. It was trading at around $165 before the news broke, but it soared to $214 by market close on Monday after the announcement.
If the stock price reaches its target, if OpenAI makes all the required contributions, and if OpenAI retains all of AMD’s stock without selling it prematurely, OpenAI could earn enough in AMD’s stock to buy a large number of GPUs. The stock could be worth about $100 billion.
“We note that vesting of the final sixth tranche requires approximately $1 trillion in market capitalization. Therefore, if OAI holds the stock until close, the value of its shares would be approximately $100 billion,” UBS analyst Timothy Arcuri wrote in a research note on Tuesday.
However, Arcuri believes the more likely scenario is that OpenAI sells AMD stock along the way to pay AMD’s bills. So essentially, this is a scheme for AMD to fund this customer’s purchase.
Still, Arcuri argues that the validation that AMD’s AI GPUs can handle OpenAI workloads, and by extension other AI workloads, is enough for AMD to take this funding gamble. “AMD emphasizes continued customer dialogue beyond OpenAI, and we hope this agreement will ultimately accelerate AMD adoption momentum,” he wrote. In particular, OpenAI’s approval allows the company to sell GPUs to many cloud service providers that already offer CPUs.
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So in the long run, retail and institutional investors will be the ones who actually pay for OpenAI’s massive multi-year purchase of AMD GPUs if it actually drives up the stock price.
Nvidia is also funding OpenAI’s purchase of Nvidia products in a variety of ways, with a $100 billion investment of its own announced last month. The difference, of course, is that Nvidia’s multiple investments in OpenAI have given it a stake in a fast-growing AI provider, not the other way around.
But what choice did AMD have? By financially structuring the deal at almost no cost, OpenAI gained a major foothold into one of the largest next-generation data center builds the world has ever seen (as much as 30% market share by USB estimates).
Arcuri acknowledged that AMD’s deal is “probably less attractive” than Nvidia’s, but “we think this is an important validation of (AMD’s) roadmap that could snowball to other customers.”
