Should Investors Buy AMD as Nvidia Targets Its Latest Purchase?

Advanced microdevices (AMD 0.90%) made a big move on the acquisition front by agreeing to acquire ZT Systems. The move is made to advance its artificial intelligence (AI) strategy and compete better against the rival Nvidia (NVDA 0.98%).

Let’s take a closer look at the deal and how it will help the company moving forward.

Becoming an end-to-end solutions provider for data centers

AMD will acquire ZT Systems for $4.9 billion in a cash and stock deal, with about 75% of that being cash. The transaction is expected to close in the first half of next year.

ZT Systems designs and builds servers, storage, accelerators and other data center equipment. The acquired company is expected to generate approximately $10 billion in revenue. It includes cloud computing giants Microsoft and Amazon among its biggest customers. The deal will also bring about 1,000 ZTE engineers with it.

Upon closing, the company will look to sell ZT Systems’ manufacturing business within the next 12 to 18 months. This is a lower margin business that they compete with Super Micro Computer.

The deal is clearly aimed at better competing with rival Nvidia, which has moved beyond just selling graphics processing units (GPUs) and is looking to sell end-to-end system solutions that include pre-assembled server racks, equipment network (this comes from the previous Mellanox acquisition) and software. Server racks based on Nvidia’s Blackwell architecture are expected to cost between $1.8 million for its GB200 NVL36 system and $3 million for its NVL72 system.

Given the price of these server systems, it should come as no surprise that AMD wants to enter this arena. Complete systems enable faster deployments, which is important as cloud computing and other companies race to build their AI infrastructures. AMD already had the networking component of these systems as well, so this seems like a natural extension.

In addition to this deal, AMD has made a number of smaller software acquisitions over the past year. These include Mipsology for AI inference and Nod.Ai models for AI last year and Silo AI this year. Silo AI developed large language models (LLMs) that were trained at scale on AMD Instinct accelerators.

Image source: Getty Images

Should Investors Buy AMD Stock?

The ZT Systems acquisition likely won’t affect Nvidia’s AI dominance. Nvidia is still the preferred supplier of AI chips and systems, in large part because developers have learned to program GPUs using its CUDA software platform. This is a wide ditch to swim across.

However, AMD doesn’t need to overtake Nvidia as the AI ​​chip leader to be successful; it just needs to become a solid viable second option. After all, Nvidia is expected to generate more than $100 billion in data center revenue this year, while AMD projects just $4.5 billion in AI chip revenue for the year.

So, for example, if AMD could go from 5% to 10% market share, they would see an increase in AI. This would be due to a combination of huge market growth and share taking. The AI ​​infrastructure market is so insatiable that there is clearly room for another player to emerge.

From a valuation perspective, AMD is currently trading at a forward price-to-earnings (P/E) ratio of around 28, based on analyst estimates in 2025. Given the upside potential in AI ahead of it, this is a reasonable.

AMD PE report data (1 year ago) by YCharts. PE ratio = price-earnings ratio.

I think AMD’s outlook in the AI ​​data center space has gotten much brighter with this acquisition, and as such, I’d be a buyer of the stock around current levels. However, I also don’t think this deal will have much of an impact on Nvidia or its long-term prospects. The market is growing so fast with no signs of letting up, and there may be more than one winner in the AI ​​chip space.