AMD Soars on OpenAI Deal. Is It Too Late to Buy the Stock?

Advanced Micro Devices' (NASDAQ: AMD) stock soared earlier this week after the company announced a new partnership with OpenAI that could greatly improve its fortunes in the artificial intelligence (AI) chip market. As part of the deal, OpenAI will deploy 6 gigawatts of AMD's Instinct graphics processing units (GPUs) across multiple generations of hardware, beginning with a 1 gigawatt rollout of its MI450 chip in the second half of 2026.

Meanwhile, AMD granted OpenAI warrants for up to 160 million shares that vest as specific rollout and share price milestones are hit, with the final tranche tied to AMD's stock reaching $600 a share. AMD said the deal will be immediately accretive and gives it a clear line of sight to tens of billions of dollars in annual AI data center revenue beginning in 2027.

Looking to challenge Nvidia

What makes this arrangement so striking is how different it looks from the Nvidia deal OpenAI signed just a couple of weeks earlier. Nvidia invested directly into OpenAI, which would allow it to help fund the company's purchase of its chips, while here the capital flow is reversed. Instead of AMD investing in OpenAI, the AI model company will take a stake in AMD, which gives it every reason to help AMD's chips succeed. This is important because it shows a concerted effort by one of the company's biggest builders of AI infrastructure to diversify away from a single chip supplier. It is also believed that OpenAI has designed a custom chip with Broadcom that will start to be delivered next year.

The market's reaction shows how significant this is for AMD. For years, the company has been a distant second in the data center GPU market due to the moat Nvidia created with its CUDA software platform and entrenched ecosystem. AMD's Instinct chips have improved steadily, but Nvidia's software edge has been difficult to overcome. Landing OpenAI as an anchor customer gives its software ecosystem a powerful partner committed to making it work. That combination could open doors with other hyperscalers (companies that own massive data centers) that have been looking for a viable alternative to Nvidia's premium-priced chips. With the market expected to shift from training large language models (LLMs) more toward inference, where Nvidia's CUDA moat is not as strong, AMD finds itself in a good place.

Is it too late to buy the stock?

While this looks like a potentially transformative deal for AMD, there are still risks. The first gigawatt of Instinct GPUs won't ship until late 2026, and the bulk of the revenue lift comes later. Meanwhile, OpenAI's massive 6 gigawatt rollout depends on financing and on adding power infrastructure that rivals what many national grids can supply.

The warrant structure also raises some issues. OpenAI essentially receives shares for a penny each as it hits deployment and share price milestones, meaning up to 10% dilution for AMD's existing shareholders if all the conditions are met. Competition remains fierce as well. Nvidia still holds the lion's share of the market, and large customers continue to weigh a mix of GPUs from both Nvidia and AMD along with custom ASICs to balance cost, performance, and availability.

Even with those challenges, the potential upside is hard to overstate. Morgan Stanley analysts estimate that each gigawatt of AI compute could add roughly $3 in annual earnings power for AMD. That could lift its prior 2027 adjusted earnings-per-share projections from about $6.74 to closer to $10 as more gigawatts come online. Management, meanwhile, believes this partnership moves AMD toward its target of generating tens of billions of dollars annually from AI data center revenue by 2027, which would mark a dramatic shift in the company's growth profile.

After the surge, AMD trades at a forward price-to-earnings (P/E) ratio of about 36 times 2026 earnings estimates, which looks expensive at first glance. However, it has a PEG (price/earnings-to-growth) ratio of around 0.4, with PEGs below 1 considered undervalued.

While the shares could see near-term swings after such a steep rally, the longer-term story has changed fundamentally in AMD's favor. That means for long-term investors, it's not too late to buy the stock even after this run.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.