Since the advent of artificial intelligence (AI) in early 2023, Advanced Micro Devices (AMD 24.98%) has been something of a wild card. The increasing demand for graphics processing units (GPUs) that can handle the rigors of AI has been unparalleled, but not all AI chipmakers are created equal.
There's no denying that Nvidia (NVDA -0.98%) has been the biggest beneficiary of the accelerating adoption of AI, given its status as a market share leader in the data center space, where most AI processing occurs. Nvidia has ridden this unprecedented demand to new heights, becoming the largest publicly traded company in the world when measured by market cap.
While Nvidia stock has soared 1,180% since the dawn of AI, AMD stock has only risen 154% during the same period (as of market close on Friday). The company has been working diligently to stake its claim in the windfall that is AI.
Shareholders were elated when AMD announced a groundbreaking deal with OpenAI that could be a game changer. As a result, the stock gained 30% Monday morning (as of this writing) -- and that could be just the beginning.
Image source: AMD.
Far-reaching strategic partnership
OpenAI is largely credited with kick-starting the AI revolution, thanks to its development of ChatGPT, the generative AI system that took the technology to the next level. In a press release that dropped Monday morning, AMD announced a far-reaching strategic partnership with OpenAI.
Under the terms of the multiyear, multigenerational agreement, OpenAI will install 6 gigawatts of AMD GPUs. The rollout will begin with 1 gigawatt of AMD Instinct MI450 series chips and rack-scale AI solutions in the second half of 2026. Beyond simply supplying GPUs, AMD will work side by side with OpenAI as a "core strategic compute partner" to create future generations of AI chips optimized for AI applications.
The companies noted that the partnership began with the MI300X and continued with the MI350X series of chips. Many experts believe these processors are a competitive alternative to Nvidia's advanced AI chips at a lower price, making them ideal for use with the large language models that underpin generative AI.
Perhaps the most eye-opening development is that, as part of the agreement, AMD has issued OpenAI a warrant to purchase up to 160 million shares of AMD stock -- equal to a roughly 10% stake in the company -- contingent upon the company achieving specific share price targets and OpenAI reaching certain technical and commercial milestones.
The first tranche is scheduled to vest on the completion of the deployment of the first gigawatt of GPUs, with additional milestones at the completion of each successive gigawatt.
Is this deal a game changer?
In many cases, saying a deal is a game changer is hyperbole, but in this case, I don't believe it's an exaggeration. In its recent financing deal, OpenAI was valued at roughly $500 billion, making it the world's most valuable start-up. Furthermore, the company has quickly ascended the ranks to become one of the largest buyers of high-end AI-centric chips as it works to development its next-generation AI systems.
Assuming things go as planned, this deal provides AMD with a relatively secure revenue stream that the company estimates will be worth tens of billions of dollars. For context, the company generated revenue of nearly $26 billion in 2024, which helps to illustrate the magnitude of the opportunity.
Furthermore, this deal acts as a ringing endorsement for AMD's processors. For potential buyers of AMD chips sitting on the fence, this could be the catalyst for taking the plunge and adopting the company's AI solutions.
Some investors have been concerned that the adoption of AI will hit a wall, but there's simply no evidence to support these assertions. Furthermore, estimates regarding the addressable market for generative AI continue to climb. Big Four accounting firm PwC estimates the market could be worth as much as $15.7 trillion annually by 2030.
If AMD can carve out just a small piece of that massive opportunity, today's stock price move could be just the beginning. Furthermore, at roughly 35 times next year's sales, AMD stock is attractively priced relative to the burgeoning opportunity.
