The winner takes most. Advanced Micro Devices’ latest acquisition cements the chipmaker’s distant silver medal status in the artificial intelligence race. The company’s $250 billion data center business is booming, thanks to demand for training and running AI systems. The takeover of private companies ZT Systems $5 billion in cash and stock should help AMD customers buy and deploy its chips faster, but it still leaves rival Nvidia miles ahead.
The company led by Chief Executive Lisa Su was once known for playing second fiddle to Intel in making personal computer processors, but is now better known as the No. 2 company behind Nvidia in making chips for data centers. Analysts estimate that revenue from AMD’s unit serving that market will double this year to $12.8 billion, accounting for half of the company’s top line.
The systems used to train AI are getting bigger and bigger. The fact that all these chips are working together means that data centers are becoming increasingly complex. This is where ZT Systems fits in. Its 1,000 engineers can help design servers for companies like Dell Technologies and optimize versions for companies building large cloud computing services. This should speed up deployment, which is helpful in the current AI gold rush.
AMD doesn’t want to compete with customers making servers using AMD chips, so it will sell the manufacturing capacity of its new subsidiary. ZT Systems’ annual sales are about $10 billion, Su said. Reuters in an interviewwhich makes the purchase price of about half that sum look modest. Rival server maker Super Micro Computer is valued at 1.2 times its estimated revenue over the next 12 months, according to LSEG data.
Yet while AMD’s stock has outperformed the S&P 500 over the past five years, Nvidia has left it far behind in terms of shareholder returns and nearly every other metric.
The $3 trillion data center construction giant’s bid package is larger, and its software is the default standard for AI developers. Nvidia’s data center business is projected to grow slightly faster than AMD’s this year, while the unit’s projected $106 billion revenue is about an order of magnitude higher. Economies of scale also ensure that Nvidia’s overall operating margin is more than double that of its nearest competitor. This gives Nvidia CEO Jensen Huang the firepower to hire top engineers, pay premiums in bidding wars, and invest more in research and development.
The only metric on which AMD is keeping pace is its stock valuation. Its shares trade at 32 times next year’s estimated earnings, a mere 10% discount to Nvidia’s multiple.
That’s too small a gap for such a distant runner-up.
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AMD announced on August 19 that it had agreed to buy ZT Systems in a cash-and-stock deal valued at $4.9 billion, including a contingent payment of up to $400 million based on the achievement of certain post-closing milestones. ZT Systems is a privately held company based in New Jersey that designs and manufactures servers and other data center equipment. The company has annual revenue of about $10 billion. AMD plans to retain ZT Systems’ design operations but sell the company’s server manufacturing unit once the deal closes. AMD shares rose 3% to $153 as of midday August 19 in New York.
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