AMD's chip deals with OpenAI and Meta lead to a $1 billion expense this quarter

Max A. Cherney

Reuters, San Francisco, November 4 - Advanced Micro Devices (AMD) AMD.O is pursuing a strategy of granting equity in its future success to key AI clients, including OpenAI and Meta Platforms META.O, in exchange for large-scale chip purchase commitments—a move that is beginning to have a significant impact on its profits.

In February this year, AMD agreed to sell up to $60 billion worth of AI chips to Meta over five years (link) and granted the Facebook parent company warrants that would allow Meta to purchase up to 10% equity in AMD if certain milestones are met. Previously, AMD had entered into a similar agreement with OpenAI (link) last year, giving the startup the option to purchase about 10% equity in the chipmaker.

On Tuesday, AMD stated that, in the third quarter ended September 26 (link), as shipments under the related agreements started to rise, the company recorded $1.07 billion in non-cash expenses (equivalent to 66 cents per share) to reflect the impact of these warrants.

Bolstered by a surge in data center sales, the chipmaker forecast stronger-than-expected growth in 2027 (link), sending its shares up 8% in after-hours trading and lifting shares of Intel INTC.O, Nvidia NVDA.O, and Broadcom AVGO.O.

These warrants are part of a growing trend among chip and AI cloud companies to use equity incentives to secure large and long-term orders from a small group of AI clients, highlighting a cyclical AI frenzy in which companies can simultaneously be each other’s clients, suppliers, and investors.

This strategy could also dilute AMD shareholders’ stakes. If the warrants are fully vested and exercised, OpenAI and Meta could acquire a substantial amount of AMD shares at just $0.01 per share, potentially causing a significant increase in the company’s outstanding shares. The final value of the warrants will depend on AMD’s share price at the time of exercise.

The warrants granted to OpenAI also include a price threshold for AMD shares, while the warrants granted to Meta do not.

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Analysts say that while this is a strong vote of confidence in AMD’s AI chips and software, it’s unlikely to threaten Nvidia’s dominance, as the market leader continues to sell all the AI chips it can produce.

“While I do think incentives played a role in some of the sales, the more important issue is the pent-up demand for alternatives to Nvidia, and AMD’s products are now starting to compete on price-performance,” said Bob O’Donnell, chief analyst at TECHnalysis Research.

AMD has also reached a chip purchase agreement with OpenAI rival Anthropic, but that deal includes an investment commitment from AMD to Anthropic.

AMD CFO Jean Hu stated on Tuesday’s analyst call that, once OpenAI and Meta meet exercise conditions—including deliveries and other commercial requirements—the warrants will start diluting AMD shareholders. She said AMD expects to provide more guidance on when these conditions might be met by 2027.

Other AI chip and infrastructure companies have made similar equity-linked deals with key customers. Chip startup Cerebras CBRS.O granted warrants to OpenAI (link) in exchange for $20 billion in commitments, while Marvell MRVL.O granted warrants to Google, a subsidiary of Alphabet GOOGL.O, giving the search giant rights to purchase up to $12.2 billion worth of shares (link).

Qualcomm provided Amazon (link) warrants in a $60 billion AI data center chip deal.

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