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Advanced Micro (AMD +2%) continues to fortify its AI business with its agreement to acquire ZT Systems for $4.9 bln in cash and stock. The acquisition follows AMD's July 10 purchase of Silo AI for a much smaller price of $665 mln. However, while the price tags differ, the market's reaction is similar as it sends shares of the chip designer, competing against NVIDIA (NVDA) and Intel (INTC), moderately higher today.

• What is ZT Systems? The company engages in full rack deployment -- a block filled with servers, storage, switches, etc. -- for hyperscale data centers. ZT also commands a data center infrastructure manufacturing business, for which AMD announced it would seek out a strategic partner to offload this part of the company.
• What makes it a suitable fit for AMD? With massive exposure to cloud and enterprise organizations, such as Microsoft (MSFT), ZT Systems expands AMD's market and bolsters its AI business as it can couple its chips into the server racks ZT deploys. AMD can also take advantage of its ecosystem of original equipment manufacturers and original design manufacturers, delivering AI infrastructure at scale.
• While AMD did not disclose ZT Systems' financials, it anticipates the acquisition to be accretive on a non-GAAP basis by the end of next year, shortly after the expected closing date of 1H25. Incorporating today's nearly $5.0 bln purchase, AMD will have spent over $6.0 bln to improve its AI presence to better compete with NVDA and INTC in this hotly contested space.
• The amount AMD has poured into AI appears to be a sound investment thus far. Last quarter, AMD lifted its Data Center GPU revenue to exceed $4.5 bln this year, up from the $4.0 bln it targeted three months earlier. While it is unclear how much of this stems directly from the demand for AI, it was still an encouraging development, especially given that one of the recurring criticisms of the ongoing AI frenzy is that too much money is being allocated to the technology relative to the minor returns it has produced so far.

AMD's $4.9 bln acquisition of ZT Systems may just be the beginning of a long line of future purchases to strengthen its position in the AI industry and maintain a competitive footing with NVDA, which is leaps ahead of AMD from a revenue standpoint. For instance, while AMD projects $4.5 bln in Data Center GPU revs this year, NVDA recorded $47.5 bln in Data Center revs during FY24 (Jan) and is on pace to double this in FY25 following a healthy showing in Q1 (Apr).

Even though AMD has a long way to go to catch up to NVDA, if it ever does, AMD is outpacing INTC, which saw its Data Center revs contract yr/yr last quarter. Adding ZT Systems can put further distance between AMD and INTC in the Data Center industry while helping it gain some ground on NVDA. Lastly, AMD's ZT Systems purchase highlights the unwavering demand for AI, boding well for future quarterly performances.