AMD Deal Shows AI Chip Business Isn’t Just About Chips

That deal brought AMD a business generating more than $3.6 billion a year in revenue. ZT Systems had revenue of more than $10 billion over the past 12 months. But AMD won’t be keeping most of it; the company said Monday that it plans to seek a buyer for ZT’s manufacturing business once the deal closes. AMD instead will be getting about 1,000 “world-class design engineers with deep expertise in motherboard, power, thermal, networking and rack design,” Chief Executive Officer Lisa Su said on a conference call Monday morning.

It is a $5 billion acqui-hire, in other words—and one that Wall Street tentatively approves of. AMD’s stock was 2.5% higher Monday afternoon even as many other chip stocks slipped into the red.

AMD has a fast-growing business selling GPU accelerator chips used to power generative AI applications in data centers, but it is still a bit player in this market next to Nvidia NVDA 4.35%increase; green up pointing triangle. Part of the latter’s dominance can be chalked up to its ability to go beyond just chips to design full AI systems that can be easily plugged into existing data-center racks. Nvidia’s Hopper systems—the most popular product the company currently sells—consist of 35,000 parts and weigh 70 pounds. 

AMD has gone this route as well with its latest AI system called MI300, which helped the company’s data-center sales more than double to nearly $2.8 billion in the second quarter. But that is still just a fraction of the $25 billion in data-center sales analysts expect from Nvidia for the quarter ended in July, according to Visible Alpha. Pierre Ferragu of New Street Research said customers have used AMD’s systems mostly for “easier, low-scale use cases” in AI data centers to free up Nvidia’s systems for more demanding tasks. 

“The acquisition is a very valuable ‘bolt-on,’ increasing the range of use cases where AMD can be used over time,” Ferragu wrote Monday of the ZT deal. Matt Ramsay of TD Cowen wrote Monday that AMD is “well on the way to cementing its position as the de facto merchant alternative to Nvidia’s leadership position.”

Divesting the manufacturing side of ZT’s business will spare AMD some of the complications that could arise from competing with its own customers as server makers such as Dell DELL 0.51%increase; green up pointing triangle and Super Micro SMCI -0.82%decrease; red down pointing triangle buy AMD chips to sell in their products. It will also ultimately spare AMD a hit to its bottom line as the hardware business offers thinner profit margins—especially in the brutally competitive AI market. Super Micro reported record-low gross margins for the June quarter, while Dell’s operating margin for its business segment that includes AI servers also fell sharply in its April-ending fiscal quarter.

AMD’s trailing 12-month gross margin of 51.2% is more than double Dell and Super Micro’s for the same period, according to data from S&P Global Market Intelligence.     

AMD’s own profit margins have been on the rise, thanks in part to the strong growth of its AI systems. But absorbing the cost of 1,000 new workers without the attendant revenue they have been generating means AMD is also betting big that it can serve up much better growth by taking its design ability beyond just chips. Competing with Nvidia requires a lot of thinking outside the box. 

Write to Dan Gallagher at dan.gallagher@wsj.com