AMD (NAS: AMD) and OpenAI reached an agreement where AMD will supply artificial intelligence gear for up to 6 gigawatts of OpenAI’s AI infrastructure. AMD expects the deal to earn tens of billions of dollars of annual incremental revenue with the rollout starting in second-half 2026.

Why it matters: We’re highly encouraged with this deal for AMD as it validates its AI technology and significantly boosts its future AI revenue and profits. AMD hinted at the potential for “well over $100 billion” in future revenue.

  • We’ve long believed that AMD will carve out a piece of the AI pie. This deal suggests that AMD’s slice of the market might be a bit higher than expected. However, we doubt it displaces Nvidia as the dominant AI vendor.

The bottom line: We raise our fair value estimate for narrow-moat AMD to $210 from $155 thanks to this upcoming AI windfall. We retain our Very High Uncertainty Rating as surprising, massive AI deals seem to be arising weekly.

  • We have doubled our estimates for AMD’s AI GPU revenue in 2027 and beyond. We now project $42.2 billion for AMD by 2029 versus our prior estimate of $20.7 billion.
  • AMD will issue warrants for up to 160 million shares (about 10% of total shares) to OpenAI. We’re not alarmed by the warrants and suspect that investors would gladly trade this accretive revenue windfall for some stock dilution if AMD were to hit all its targets.

Coming up: OpenAI continues to have massive aspirations for AI adoption, driving significant deals with both Nvidia and AMD.

  • No timeline was set for OpenAI’s rollout. Perhaps the greatest risk to AMD’s future revenue from this deal may come from the energy and power requirements that OpenAI and its partners will need for such massive infrastructure buildouts.
  • If OpenAI and its partners were to roll out this infrastructure slower than envisioned, it might be bad for their aspirations but perhaps good for investors fearful of an AI bubble. The 90’s .com bubble had no such outside energy constraints.

AMD’s place at the AI table is secure, thanks to its OpenAI partnership

Advanced Micro Devices has significant digital semiconductor expertise and is well positioned to prosper from favorable trends in data centers and artificial intelligence. We consider AMD to be one of two notable firms in graphics processing units, which are especially well suited for AI. The company may play second fiddle to Nvidia in AI GPUs, but its GPU expertise should become increasingly valuable, and lucrative, in the years ahead.

We think AMD’s data center business should boom over the next few years. Its server CPUs should be in high demand, as should its GPUs suited for AI workloads. AMD pegs the total addressable market for AI accelerators, such as GPUs, at higher than $500 billion by 2028. While we foresee Nvidia capturing the bulk of this value over the next several years, we think that all AI vendors and customers will seek alternatives to keep Nvidia’s dominance at bay, and AMD might be the best positioned to emerge as a second source in AI. AMD’s partnership with OpenAI should validate AMD’s emergence as an AI product leader, in our view.

Historically, AMD’s primary products include processors and GPUs tailored to PCs, game consoles, and servers. In our view, AMD’s PC and server success stems from the rare x86 architecture license that it possesses from Intel, which allows AMD and Intel to build x86 CPUs for Microsoft Windows PCs. We view it as a heavy lift for Windows to rewrite its x86 software to work with other processors, but Apple made this move in recent years to support its internal ARM-based processors. ARM will likely gain share in the PC market, but we still expect x86-based chips from AMD and Intel to retain leadership in the Windows PC market for quite some time.

AMD has benefited from its outsourced manufacturing model, as its tight relationship with industry leader Taiwan Semiconductor enabled AMD to grab a technological lead as its rival, Intel, stumbled with its internal manufacturing roadmap. We anticipate that AMD will continue to gain market share over the next few years as Intel strives to turn it around, but AMD’s gains could last longer if Intel were to stumble further.

Bulls say

  • AI offers a massive opportunity to GPU makers, and while AMD lags industry leader Nvidia, we see plenty of room in the AI market for AMD.
  • AMD has gained market share in the PC CPU market as Intel’s manufacturing prowess has hit several road bumps in recent years.
  • AMD’s partnership with chip manufacturing leader TSMC, plus its adoption of a chiplet manufacturing strategy, has allowed the company to come to market with more formidable products and greater flexibility to bring new products to market quickly.

Bears say

  • AMD will need to improve its software capabilities to make a dent in Nvidia’s AI dominance, as Nvidia is strong in not only GPUs but associated AI software tools.
  • Despite AMD’s recent share gains, Intel remains the industry leader in PC CPUs and might recapture most of the market if it can deliver industry-leading manufacturing capabilities once again.
  • AMD’s gaming semicustom chip business is beholden to the design cycles and launches of new gaming consoles, and it might be a couple of more years until next-generation consoles arrive.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.