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AMD is giving OpenAI warrants (cf options) to buy AMD shares at 1c/share, but these only vest if OpenAI goes thru with AMD purchases as intended. It seems to b

AMD is giving OpenAI warrants (cf options) to buy AMD shares at 1c/share, but these only vest if OpenAI goes thru with AMD purchases as intended. It seems to basically give OpenAI an incentive to go thru with the deal.

cubefox 1y ago
[flagged]
agentcoops 1y ago
I’ve seen a lot of confusion about this type of deal recently: notably, it is often taken to imply something more or less shady is going on. I’m not sure when such arrangements became a thing, but I know equity stakes have long been an important part of enterprise SaaS deals. The reasoning is relatively straight-forward: if a large client commits to a vendor in a way that holds some risk to the former and will materially impact the latter’s business — and especially if the client’s support of said vendor will directly or indirectly benefit their competitors who might also use this vendor — an equity stake is a way to offset risk with upside. You can see this play out in the history of OpenAI. NVIDIA supported them from an early stage and in exchange received OpenAI equity to offset the risk. Now from a position of relative strength, OpenAI has become concerned about vendor lock-in and so is rationally exploring AMD. Yet, because any such deal will materially impact AMD’s stock price and there is risk both of losing time trying to train with new chips as well as of benefiting competitors if they work with AMD to improve their hardware offerings/APIs, it is reasonable to ask for equity upside. So, for the same reasons (increase in stock price and enterprise client who will help improve their product offering) only without risk, is it understandable why AMD would want to offer equity on such favorable terms. TLDR; My sense is that the sudden skepticism towards this relatively common enterprise deal structure seems to derive from the understandable interest in identifying signs of an AI bubble. Such a bubble may (and indeed almost certainly does) exist, but I don’t think this is evidence thereof. ---- EDIT: I'm just clarifying something I saw in a lot of responses. My only point is that it is important to try and empirically tease out what represents: (1) a circular deal in which vendors facing the limits of growth are subsidizing vulnerable clients; versus (2) a risk-hedging deal in which a non-market leading vendor offers upside to a market leading client. I believe the recent Oracle and NVIDIA deals are cases of (1) that provide evidence of an AI bubble, but that this AMD deal is most likely a case of (2) that provides no further evidence.
- bgwalter 1y ago
  The skepticism is not sudden. Various kinds of circular deals were common in 1999/2000, shortly before the bubble burst, when telecom equipment makers subsidized their customers in order to prop up sales.
  - agentcoops 1y ago
    I understand that. I simply think there's some importance in at least trying to empirically tease out what represents: (1) a circular deal in which vendors facing the limits of growth are subsidizing vulnerable clients; versus (2) a risk-hedging deal in which a non-market leading vendor offers upside to a market leading client. Again, I'm in no way denying either that (1) exists or that there's almost certainly an AI bubble -- I just think this difference is material. For example, I would classify the recently proposed deal between NVIDIA and OpenAI as a case of (1), but this deal between AMD and OpenAI as (2). Namely, because I think it's clear that the chips act as well as recent advancements by Chinese manufacturers are threatening to NVIDIA's market-leading position and OpenAI investigating new vendors suggests they have suddenly become concerned with reducing cost of goods. Indeed, if both the leading Chinese firms and OpenAI were shown to be able to work with other vendors without sacrificing speed to market it would materially impact NVIDIA's stock price. AMD, on the other hand, is not trying to subsidize an existing client, but convince a market leader to take a risk. The NVIDIA deal, then, suggests to me that certain limits have been reached in the industry, while the AMD deal does not provide me with any further evidence as to the existence of a bubble.
- stingraycharles 1y ago
  I think the skepticism is mostly aimed towards OpenAI making commitments to spend copious amounts of money, rather than the options that AMD is offering which makes sense.
- mrandish 1y ago
  I generally agree with your point. OpenAI committing to buying a bunch of AMD hardware and doing the work to integrate support for it in their systems is a risk for OpenAI and a benefit for AMD (as demonstrated by the AMD stock popping on the announcement). So the warrants give OpenAI equity upside to offset risk. I think the skepticism comes from the recent OpenAI/Oracle deal which seemed kind of circular due to paying with equity whose value was being inflated by the deal itself (if I understand it correctly). This deal seems more like an outright gift of equity if OpenAI goes through with the deal - so it could be thought of as almost a rebate or net discount on the cost of the GPUs.
stingraycharles 1y ago
The stock popped quite a bit today, so investors seem to think this is a good deal for AMD. I tend to agree, may finally enable AMD to get a foot in the door in the whole large scale AI market.
- NaomiLehman 1y ago
  AMD cards are good for inference or new low-level stuff anyway and more cost-effective. it's a good deal for everyone.
  - ptero 1y ago
    AMD has great hardware, but its software still leaves a lot to be desired for AMD to be a major AI hardware player. It takes years of unwavering leadership focus and hundreds of millions (probably billions) of dollars to get the software that works well for AI users. The role the software played to get NVIDIA from a run-of-the-mill video card manufacturer to the top dog in AI hardware with 4T market cap is often underappreciated. My 2c.
    - noir_lord 1y ago
      > AMD has great hardware, but its software still leaves a lot to be desired for AMD to be a major AI hardware player. It takes years of unwavering leadership focus and hundreds of millions (probably billions) of dollars to get the software that works well for AI users. It does but they have a capable CEO with a vision and broad support from the board - Ryzen was a decade long over night success.
      - RossBencina 1y ago
        Zen is a success. But Zen is hardware, and AMD is (historically) a hardware company. Delivering software is hard, even if you're a software company. I wouldn't take it as given that a good (hardware) CEO, vision, and board support are sufficient to build the required software organisation, especially given their track record on this front to date. It is more likely that Modular is AMD's software savior. I won't speculate on how probable that is.
throwaway2037 1y ago
Can someone with banking / deal-making experience explain to me how this warrant works? My point: If OpenAI exercises the warrant and buys 10% of AMD for 1 penny per share, where does AMD get the shares? Or will they do a secondary offering and dilute existing shares? Or do they take from treasury holdings (of shares)? Or does AMD coordinate a buyback of shares, then deliver to OpenAI?
- TacticalCoder 1y ago
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- deleted 1y ago
  [deleted]
- tim333 1y ago
  They issue new shares. Or effectively already have by issuing the warrants.

cubefox 1y ago

[flagged]

agentcoops 1y ago

I’ve seen a lot of confusion about this type of deal recently: notably, it is often taken to imply something more or less shady is going on. I’m not sure when such arrangements became a thing, but I know equity stakes have long been an important part of enterprise SaaS deals. The reasoning is relatively straight-forward: if a large client commits to a vendor in a way that holds some risk to the former and will materially impact the latter’s business — and especially if the client’s support of said vendor will directly or indirectly benefit their competitors who might also use this vendor — an equity stake is a way to offset risk with upside. You can see this play out in the history of OpenAI. NVIDIA supported them from an early stage and in exchange received OpenAI equity to offset the risk. Now from a position of relative strength, OpenAI has become concerned about vendor lock-in and so is rationally exploring AMD. Yet, because any such deal will materially impact AMD’s stock price and there is risk both of losing time trying to train with new chips as well as of benefiting competitors if they work with AMD to improve their hardware offerings/APIs, it is reasonable to ask for equity upside. So, for the same reasons (increase in stock price and enterprise client who will help improve their product offering) only without risk, is it understandable why AMD would want to offer equity on such favorable terms. TLDR; My sense is that the sudden skepticism towards this relatively common enterprise deal structure seems to derive from the understandable interest in identifying signs of an AI bubble. Such a bubble may (and indeed almost certainly does) exist, but I don’t think this is evidence thereof. ---- EDIT: I'm just clarifying something I saw in a lot of responses. My only point is that it is important to try and empirically tease out what represents: (1) a circular deal in which vendors facing the limits of growth are subsidizing vulnerable clients; versus (2) a risk-hedging deal in which a non-market leading vendor offers upside to a market leading client. I believe the recent Oracle and NVIDIA deals are cases of (1) that provide evidence of an AI bubble, but that this AMD deal is most likely a case of (2) that provides no further evidence.

bgwalter 1y ago
The skepticism is not sudden. Various kinds of circular deals were common in 1999/2000, shortly before the bubble burst, when telecom equipment makers subsidized their customers in order to prop up sales.
- agentcoops 1y ago
  I understand that. I simply think there's some importance in at least trying to empirically tease out what represents: (1) a circular deal in which vendors facing the limits of growth are subsidizing vulnerable clients; versus (2) a risk-hedging deal in which a non-market leading vendor offers upside to a market leading client. Again, I'm in no way denying either that (1) exists or that there's almost certainly an AI bubble -- I just think this difference is material. For example, I would classify the recently proposed deal between NVIDIA and OpenAI as a case of (1), but this deal between AMD and OpenAI as (2). Namely, because I think it's clear that the chips act as well as recent advancements by Chinese manufacturers are threatening to NVIDIA's market-leading position and OpenAI investigating new vendors suggests they have suddenly become concerned with reducing cost of goods. Indeed, if both the leading Chinese firms and OpenAI were shown to be able to work with other vendors without sacrificing speed to market it would materially impact NVIDIA's stock price. AMD, on the other hand, is not trying to subsidize an existing client, but convince a market leader to take a risk. The NVIDIA deal, then, suggests to me that certain limits have been reached in the industry, while the AMD deal does not provide me with any further evidence as to the existence of a bubble.
stingraycharles 1y ago
I think the skepticism is mostly aimed towards OpenAI making commitments to spend copious amounts of money, rather than the options that AMD is offering which makes sense.
mrandish 1y ago
I generally agree with your point. OpenAI committing to buying a bunch of AMD hardware and doing the work to integrate support for it in their systems is a risk for OpenAI and a benefit for AMD (as demonstrated by the AMD stock popping on the announcement). So the warrants give OpenAI equity upside to offset risk. I think the skepticism comes from the recent OpenAI/Oracle deal which seemed kind of circular due to paying with equity whose value was being inflated by the deal itself (if I understand it correctly). This deal seems more like an outright gift of equity if OpenAI goes through with the deal - so it could be thought of as almost a rebate or net discount on the cost of the GPUs.

stingraycharles 1y ago

The stock popped quite a bit today, so investors seem to think this is a good deal for AMD. I tend to agree, may finally enable AMD to get a foot in the door in the whole large scale AI market.

NaomiLehman 1y ago
AMD cards are good for inference or new low-level stuff anyway and more cost-effective. it's a good deal for everyone.
- ptero 1y ago
  AMD has great hardware, but its software still leaves a lot to be desired for AMD to be a major AI hardware player. It takes years of unwavering leadership focus and hundreds of millions (probably billions) of dollars to get the software that works well for AI users. The role the software played to get NVIDIA from a run-of-the-mill video card manufacturer to the top dog in AI hardware with 4T market cap is often underappreciated. My 2c.
  - noir_lord 1y ago
    > AMD has great hardware, but its software still leaves a lot to be desired for AMD to be a major AI hardware player. It takes years of unwavering leadership focus and hundreds of millions (probably billions) of dollars to get the software that works well for AI users. It does but they have a capable CEO with a vision and broad support from the board - Ryzen was a decade long over night success.
    - RossBencina 1y ago
      Zen is a success. But Zen is hardware, and AMD is (historically) a hardware company. Delivering software is hard, even if you're a software company. I wouldn't take it as given that a good (hardware) CEO, vision, and board support are sufficient to build the required software organisation, especially given their track record on this front to date. It is more likely that Modular is AMD's software savior. I won't speculate on how probable that is.

throwaway2037 1y ago

Can someone with banking / deal-making experience explain to me how this warrant works? My point: If OpenAI exercises the warrant and buys 10% of AMD for 1 penny per share, where does AMD get the shares? Or will they do a secondary offering and dilute existing shares? Or do they take from treasury holdings (of shares)? Or does AMD coordinate a buyback of shares, then deliver to OpenAI?

TacticalCoder 1y ago
[dead]
deleted 1y ago
[deleted]
tim333 1y ago
They issue new shares. Or effectively already have by issuing the warrants.