AMD: Acquisition of ZT Systems Should Aid AI Efforts; Maintain $145 Fair Value Estimate

We maintain our $145 fair value estimate for narrow-moat Advanced Micro Devices after the company announced a definitive agreement to acquire privately held ZT Systems for $4.9 billion. Strategically, we think the deal is reasonable as it will provide AMD with expertise in artificial intelligence infrastructure systems and services. We agree with AMD, Nvidia, and others that suggest that AI is a systems problem that is more complex than merely buying the best AI graphics processor off the shelf. We think the inclusion of ZT’s design enablement and services business will make AMD a bit more competitive with Nvidia, as we think that the latter’s strength stems at least in part from selling full AI solutions, including software and networking. However, we don’t view this deal as a tectonic shift in the AI landscape, and we still foresee AMD carving out only a sliver of the total AI pie over time.