AMD's MI450 Chip Just Landed Its First Mega-Deal. Here's What Investors Should Know.

As the artificial intelligence (AI) revolution enters its fourth year, demand for AI-capable chips continues at a blistering pace, yielding more than a few winners. While Nvidia controls the biggest share of the data center graphics processing unit (GPU) market, Advanced Micro Devices (NASDAQ: AMD) has no plans to cede the opportunity to its larger rival. As such, the company has taken a novel approach to attracting buyers for its high-end AI chips, which was on full display this week.

AMD announced on Tuesday that it landed a multiyear, multigeneration deal with Meta Platforms (NASDAQ: META) that could be worth as much as $100 billion. Meta will deploy six gigawatts of custom AMD Instinct MI450 GPUs as part of a major data center build-out. This expands on the pair's existing partnership and "aligns roadmaps across silicon, systems, and software to deliver AI platforms purpose-built for Meta's workloads." The MI450 chips and Helios rack-scale servers are scheduled to begin shipping later this year.

Image source: AMD.

At what cost?

Perhaps more importantly to AMD shareholders, the company issued Meta a performance-based warrant that would allow Meta to buy up to 160 million shares of AMD common stock. If exercised, Meta could own up to 10% of AMD's outstanding stock.

AMD struck a similar six-gigawatt deal with OpenAI late last year, which gave the start-up the option to purchase up to 160 million shares at $0.01 per share, giving OpenAI a 10% stake in AMD.

AMD CEO Lisa Su said the way the deal was structured was a "win-win" for shareholders. She went on to say, "We're early in the cycle of seeing what the ultimate payoff can be ... We have to invest ahead of the curve and really point in the direction that is going to have the largest benefit."

This is not an exclusive arrangement, and it's important to step back and put it in context. The deal comes in the wake of an agreement revealed just last week in which Meta announced a multiyear, multigenerational partnership with Nvidia -- AMD's larger competitor -- in a large-scale deployment of Nvidia CPUs and "millions of Nvidia Blackwell and Rubin graphics processing units (GPUs), as well as the integration of Nvidia Spectrum-X Ethernet switches."

The agreement is part of Meta's rapid hyperscale data center build-out, optimized for both AI training and inference. It also helps illustrate that while Meta's deal with AMD is certainly a vote of confidence, it also underscores that it's by no means exclusive.

On the one hand, this deal aligns Meta's interest with AMD and increases the likelihood of future chip sales. On the other hand, it raises the question of whether AMD is giving away too much to secure these deals. The warrants in question are good until 2031, so they won't dilute existing shareholders until they are exercised. However, if Meta and OpenAI both exercise their warrants, it would dilute existing shareholders by 20%. It also represents one of the circular deals that has been attracting scrutiny from AI investors.

Is this a shrewd business arrangement, or is AMD giving away the store? That depends a great deal on whether AMD is done doing deals for shares. Only time will tell.

Danny Vena, CPA has positions in Meta Platforms and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.