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AMD wants to take on Nvidia with a $5 billion AI acquisition.

On August 19, Advanced Micro Devices ( AMD ) announced the signing of a definitive agreement to acquire ZT Systems, a provider of AI infrastructure. The acquisition, valued at $4.9 billion, is expected to enhance AMD's non-GAAP earnings by the end of 2025.

ZT Systems is a private company founded in 1994 and headquartered in New Jersey. It provides complex compute, storage, and accelerator solutions and has an approximate annual revenue of $10 billion, Forbes reported. Its largest clients include Amazon’s AWS and Microsoft’s Azure.

AMD’s CEO Lisa Su said ZT Systems can help the company “sell more GPUs.”

The company intends to spin off ZT’s server manufacturing business and sell it after the deal closes, as it has no intention of competing with companies like Super Micro Computer ( SMCI ) , according to Su.

AMD’s primary focus has been on the AI chip market, chasing after its larger rival, Nvidia, which has 80% of market shares.

Related: Analysts reset targets for key Nvidia supplier after earnings

Earlier acquisitions also highlight AMD’s ambition for AI development. On August 12, AMD said it completed a smaller acquisition of Silo AI, a private AI lab in Europe, for $665 million. AMD said the deal brings a wealth of AI talent to the company.

AMD unveiled several products in June, including the MI325X accelerator and Ryzen AI 300 processor. It plans to roll out an updated Ryzen AI 300 Pro version this October. The rapid product rollout is also par for the course. Nvidia plans to bring new chips to market on a “one-year rhythm,” and AMD doesn’t want to be left behind.

“AI is our number one priority, and we’re at the beginning of an incredibly exciting time for the industry,” Su said during the Computex tech conference in Taipei.

AI drove strong revenue growth in Q2

AMD delivered upbeat financial results for the second quarter and predicted strong demand for generative AI in the future.

On July 30, the company posted adjusted earnings per share of 69 cents, compared with analysts’ forecast of 68 cents. Revenue came in at $5.84 billion, up 9% year over year, beating the $5.72 billion expected.

Shares of AMD popped 4.36% on the next trading day following the announcement.

For Q3 2024, AMD projects revenue to be around $6.7 billion, with an expected year-over-year growth of about 16%.

Related: Analysts reboot AMD stock price target after earnings

“We delivered strong revenue and earnings growth in the second quarter driven by record Data Center segment revenue,” said Su in a press release. “Our AI business continued accelerating and we are well positioned to deliver strong revenue growth in the second half of the year led by demand for Instinct, EPYC and Ryzen processors.”

AMD stock is up about 12% year-to-date as of August 20, while its rival Nvidia added 160%. Nvidia will post its second-quarter earnings on August 28.

Analysts share mixed comments on AMD stock

BofA is neutral on AMD's ZT Systems acquisition.

“It appears to be a complex deal just to get 1000 system design engineers and then hoping they help drive incremental AMD GPU sales,” the analyst said. However, the analyst also said it could help AMD compete better with Nvidia. BofA maintains a buy rating and a $180 price target on AMD shares.

Oppenheimer retains a perform rating on AMD following the deal. The analyst notes that ZT enhances AMD's silicon and software with systems-level solutions but believes AMD faces big challenges against Nvidia's strong AI position.

“A long road ahead against entrenched AI 800lb gorilla,” the analyst said. Oppenheimer remains cautious about AMD stock.

More Wall Street Analysts:

Wedbush sees AMD's $4.9 billion acquisition of ZT Systems as a strategic move. The firm notes that AMD acquired ZT at a discount, likely due to shifts in the design manufacturer market and Foxconn's growing role in Nvidia's server supply chain. They also believe AMD might recoup much of the cost through asset sales.

Wedbush is cautiously optimistic and maintains an outperform rating with a $200 price target.

AMD stock traded at around $156 on August 20.

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