AMD's Stock is Set to Extend Gains as Its Splashy Ai Deal Draws Cheers

Advanced Micro Devices Inc. (AMD) appears set to extend its winning streak, with its stock poised to rise for the fourth consecutive session on Tuesday. This upward momentum comes as Wall Street continues to process the company's recent acquisition in the artificial intelligence (AI) sector.

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AMD's plan to acquire ZT Systems for $4.9 billion is seen as both "strategic and opportunistic" by Matt Bryson of Wedbush. ZT Systems specializes in AI infrastructure and has significant experience catering to hyperscale cloud customers with AI systems, making it a valuable addition to AMD's portfolio.

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Bryson believes that AMD's management has strong reasoning for this acquisition, as ZT Systems' expertise in servers and clusters could accelerate AMD's ability to bring more advanced systems to market. This move could enhance AMD’s competitive edge, allowing it to develop and deploy cutting-edge technology at a faster pace.

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Financially, Bryson suggests that AMD might have secured ZT Systems at a discounted price, partially due to shifts in the original-design-manufacturer (ODM) market and the growing involvement of Foxconn in Nvidia's server supply chain. This favorable acquisition price could further benefit AMD when it eventually divests ZT Systems' hardware business, potentially recouping a substantial portion of the initial investment.

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Bryson remains cautiously optimistic about the deal's long-term value for AMD, interpreting the company's willingness to invest heavily as an indication of positive market trends in the graphics processing unit (GPU) sector. He maintains an "outperform" rating on AMD's stock, with a target price of $200.

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On Tuesday morning, AMD's shares saw a 1.3% increase, contributing to an impressive 11.7% rally over the past four sessions. Since hitting an eight-month low of $128.67 on August 7, AMD's stock has surged by 22.2%.

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Harlan Sur from JPMorgan views the acquisition as "a step in the right direction" for AMD, potentially helping the company close the gap with Nvidia in the coming years. He highlights that as power requirements for AI systems grow, AMD could benefit from ZT Systems' expertise in both liquid and air cooling solutions. The acquisition also marks a strategic shift for AMD, moving beyond just AI silicon to offering complete system solutions.

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Sur is also optimistic about AMD's prospects when it sells off the hardware business. He estimates that AMD could fetch between $3 billion and $5 billion from such a sale, while retaining ZT Systems' 1,000 engineers and their valuable expertise. Sur has a neutral rating on AMD with a target price of $180.

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Harsh Kumar of Piper Sandler considers this acquisition to be the "final puzzle piece" for AMD. According to Kumar, AMD has been competitive with Nvidia at the silicon level and has made strides in software development, but it has lagged behind in complete system performance. The addition of ZT Systems' team of engineers, with their rack-level expertise, could allow AMD to play a more decisive role in the design of servers and racks going forward.

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Kumar ranks AMD as his top pick among large-cap semiconductor stocks, holding an overweight rating with a $175 price target.

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William Stein, an analyst at Truist Securities, also acknowledges the strategic intent behind AMD’s purchase of ZT Systems. However, he points out that this acquisition alone does not fully level the playing field with Nvidia. Stein believes Nvidia still maintains a significant advantage in system-level design and, more importantly, in software. As a result, he has a hold rating on AMD shares, with a target price of $150.

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In summary, AMD’s acquisition of ZT Systems is being viewed as a strategic move that could strengthen its position in the AI space, particularly in its competition with Nvidia. While the acquisition is expected to bring substantial benefits in terms of system design and market positioning, some analysts believe that AMD still has challenges ahead, especially in catching up with Nvidia's software dominance. Overall, the market's response has been positive, with AMD's stock showing strong gains as investors digest the implications of this latest move.

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