AMD (Advanced Micro Devices) ( AMD 1.24% ) is lagging significantly behind Nvidia In the AI accelerator market, Nvidia holds several key competitive advantages. As a pioneer in the field, it capitalized on the increasing demand for AI chips early on. Additionally, its CUDA computing platform has established a strong presence in both academic and industrial sectors over the last 18 years.
AMD anticipates generating sales exceeding $4.5 billion. worth of Devices or technologies that enhance the performance and efficiency of artificial intelligence tasks This year, the company’s lineup is led by the impressive Instinct MI300X. They intensified their focus on AI by acquiring ZT Systems, a server solutions provider with clients that include major cloud computing and telecom companies, for $4.9 billion.
Reasons why this agreement is logical
Initially, when I learned that AMD was spending so much on acquiring a server company, it seemed like a poor decision. The industry of creating, producing, and marketing server systems typically operates with slim profit margins. Supermicro , which has become a frontrunner in the AI server industry, successfully achieved a gross margin of only 11.2% in its most recent quarter. AMD’s gross margin is approximately 50%.
It’s unlikely that AMD is spending close to $5 billion on acquiring a server design and manufacturing firm simply to enter the server industry. Rather, the company is focused on speeding up the use of its AI chips.
Some data center clients prefer to purchase AI accelerators separately, while others opt for complete AI servers that come with storage, networking, and additional components. As Nvidia leads the AI chip market and promotes its own AI server solutions, AMD encounters significant challenges in convincing server developers to construct systems using its accelerators.
AMD refers to this transaction as a “strategic acquisition” for valid reasons. It seems to be a step towards a larger goal and may negatively impact AMD’s gross margin. Significantly, the company intends to divest ZT Systems’ manufacturing operations after the deal is finalized.
In their announcement, the company mentioned that they are looking for a strategic partner to purchase the manufacturing segment of the business. This move will enable AMD to retain ZT Systems’ design expertise and customer base while outsourcing the manufacturing process.
AMD projects that the market for data center AI accelerators will hit $400 billion by 2027. Even if this forecast turns out to be too optimistic, AMD still has the chance to significantly boost its AI accelerator sales if it can loosen Nvidia’s tight grip on the industry. By developing AI server design capabilities internally, AMD will enhance its ability to offer its robust AI chips to cloud and enterprise clients.
Enhancing the data center industry
AMD’s performance in the second quarter presented a mixture of outcomes, however, the data center division stood out as a strong point. Revenue from data centers surged over 100% compared to the previous year, reaching $2.8 billion. This growth was propelled by shipments of AI accelerators and the company’s EPYC server CPUs.
After the ZT Systems acquisition is finalized in the first half of 2025, the company will be integrated into the data center solutions division. Currently, this division is AMD’s largest and probably offers the most promising long-term growth opportunities due to the rapidly increasing demand for AI chips.
From a strictly financial viewpoint, investing $4.9 billion in a server company may not seem logical. Nonetheless, as a strategy to boost the use of AMD’s AI chips in a market largely controlled by Nvidia, it is completely rational.
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