Why Meta’s Mega Deal with AMD Highlights Nvidia’s Enduring Dominance

Advanced Micro Devices (AMD) has announced a significant strategic partnership with Meta Platforms, committing to a multiyear agreement valued at over $60 billion. This deal, which involves Meta purchasing 6 gigawatts of AMD’s graphics processing units (GPUs) for its AI data centers, is a bold move by AMD to challenge the dominance of Nvidia in the AI chip market. Each gigawatt, according to AMD CEO Lisa Su, represents “double-digit billions” in revenue.

Beyond the substantial chip order, the agreement includes a unique provision: Meta could acquire nearly 10% of AMD’s stock at no upfront cost, contingent upon achieving specific deployment milestones and stock price targets. This follows a similar equity award granted to OpenAI as part of a chip sale agreement in October. While AMD seeks to gain market share, the structure of these deals suggests a strategy born from a position of perceived weakness compared to industry leader Nvidia.

For Nvidia investors, the implications of AMD’s strategic alliances with major AI players like Meta and OpenAI warrant attention. However, the fact that AMD is willing to dilute its own shareholder base to secure these partnerships may offer some comfort. Both Meta and OpenAI could potentially acquire up to 160 million shares of AMD’s common stock, which, if all vesting milestones are met, would represent approximately 20% of AMD’s current 1.63 billion outstanding shares.

Despite potential future dilution concerns, the market has reacted positively in the short term, with AMD shares experiencing a significant uptick following the announcement. Meta’s stock, while showing modest gains, remains down for the year, reflecting investor concerns about its substantial investments in the AI race.

This situation contrasts sharply with Nvidia’s own blockbuster chip deal with Meta, which did not involve any equity concessions from Nvidia. Furthermore, Nvidia is reportedly in discussions to invest up to $30 billion in OpenAI, a clear indication of its strong market position and financial leverage.

Jim Cramer, in his “Morning Meeting,” highlighted that AMD appears to be operating from a position of weakness, while Nvidia is clearly leveraging its strength. Nvidia’s robust financial position allows it to invest in a wide range of companies and technologies, including Intel, CoreWeave, and Synopsys, as well as fund its own innovation efforts to maintain its technological edge. Companies with superior technology, like Nvidia, can secure supply agreements based on merit without resorting to equity giveaways.

This advantage was also evident in Corning’s January agreement to supply Meta with $6 billion worth of fiber-optic data center cabling, a deal that did not require any equity awards. The implication is that if a major customer were to shift away from Nvidia, there would likely be ample alternative demand. AMD, lacking this same level of market dominance, finds itself in a position where offering equity stakes is a strategic necessity to secure long-term commitments.

The competitive landscape will be a key focus when Nvidia reports its earnings. AMD, however, defends its approach, stating that the equity awards are performance-based and will be accretive to its adjusted earnings per share. CEO Lisa Su emphasized that the Meta partnership is a “win-win” and a strategic move to align incentives and expand beyond a typical commercial arrangement.

During a call with analysts, when questioned about the rationale behind offering equity for a strong product, Su reiterated the positive impact on earnings per share and highlighted the broader strategic benefits across AMD’s product roadmap. She argued that with Meta having a stake in AMD, their incentives are aligned, and AMD will benefit from increased revenue scale and ecosystem maturity as Meta deploys AMD GPUs.

While AMD’s strategy is understandable in the highly competitive and lucrative AI market, and Meta’s desire to secure chip supply from multiple sources is logical, these deals underscore Nvidia’s entrenched leadership position. For investors who prioritize market dominance and a strong financial footing, Nvidia continues to operate in a league of its own, securing its position without the need for equity concessions.