Advanced Micro Devices recorded a $1.07 billion non-cash charge, or 66 cents a share, in the third quarter ended September 26 to account for warrants issued to major AI customers OpenAI and Meta Platforms. The charge comes as shipments under these agreements begin to ramp up, Reuters reported.
Equity incentives drive chip commitments
The non-cash charge follows a strategy where AMD offers stakes in its future success to secure massive, long-term purchases from a small group of AI customers. A five-year agreement reached in February involves AMD selling as much as $60 billion in AI chips to Meta, providing the Facebook owner with warrants that allow for the purchase of up to 10% of the chip firm upon meeting specific milestones. This arrangement succeeded a comparable pact with OpenAI last year, which provided the startup the option to acquire approximately 10% of the chipmaker.
During Tuesday’s analyst call, AMD finance chief Jean Hu stated that the warrants will start to dilute AMD shareholders once the commercial and shipment requirements, along with other vesting and exercise conditions, are satisfied by Meta and OpenAI. AMD expects to provide more guidance in 2027 on when those conditions could be met, she said.
This approach reflects a trend among AI infrastructure providers. Other AI chip and infrastructure companies have struck similar equity-linked deals with major customers:
- Chip startup Cerebras granted OpenAI warrants in exchange for a $20 billion commitment.
- Google, owned by Alphabet, has been issued warrants by Marvell that allow the search giant to acquire a stake worth a potential $12.2 billion.
- Qualcomm gave Amazon warrants in a $60 billion deal for its AI data-center chips.
Surging data center revenue offsets charges
Despite the profit hit, AMD grew third-quarter revenue 45% to a record $13.4 billion as data center sales nearly doubled. The Motley Fool noted that data center revenue was $8.5 billion, up 97%. AMD expects growth to speed up to roughly 66% next quarter.
The company is currently managing high costs associated with this expansion. To prepare for its fourth-quarter ramp, AMD increased its inventory by roughly $3 billion this quarter while constructing Venice chips and Helios rack systems. It also borrowed heavily, more than doubling its debt since June.
$AMD RECORDED A $1.1B NON-CASH CHARGE TIED TO ITS OPENAI & META WARRANTS DEALS IN Q3 Buried in AMD's Q3 earnings reconciliation is a $1.097B change in the fair value of customer warrants, reducing GAAP EPS by $0.66. Here's how it works. Under its AI deals, OpenAI and Meta each… pic.twitter.com/GUC1gAN8sW
AMD products meet demand for Nvidia alternatives
While experts viewed this as a significant endorsement of AMD’s software and AI chips, they noted it is improbable to weaken Nvidia’s market leadership, given that the top player continues to sell all available AI chip production. Reuters reported that TECHnalysis Research chief analyst Bob O’Donnell believes the primary driver for these sales is the demand for a viable alternative to Nvidia.
While I do believe incentives played a role in some of their sales, I believe the bigger issue is that there is pent-up demand for a serious alternative to Nvidia and AMD’s products are now starting to compete on price/performance metrics,
Bob O’Donnell, TECHnalysis Research chief analyst
The strategy also risks diluting AMD shareholders. Should the warrants be fully exercised and vest, OpenAI and Meta may hold a significant portion of the chipmaker for as little as one cent per share, which could lead to a substantial increase in AMD’s total share count. OpenAI’s warrant also includes AMD share-price thresholds, while Meta’s does not.
Earlier coverage: AMD Faces Third-Quarter Earnings Under Heavy Market Pressure