In August 2024, AMD made a significant move to challenge NVIDIA’s dominance in the AI chip market with the acquisition of ZT Systems, a cloud architecture solution provider, for $4.9 billion. This acquisition, projected to close in the first half of 2025, is part of AMD’s strategy to bolster its position in the AI infrastructure market that has made NVIDIA worth trillions of dollars.

Industry analyst Patrick Moorhead notes that AMD forecasts the AI accelerators and GPUs market to reach $400 billion by 2027. “I believe this acquisition, if executed with [Lisa Su’s] typical precision, will be an accelerant the company needs to drive parabolic revenue growth for both Instinct and head-node EPYC with the hyperscalers, tier-two CSPs, and even some of the largest on-prem facilities for government agencies and financial, energy, and pharma enterprises,” Moorhead said on X (formerly Twitter).

Elevating AMD’s AI profile and capabilities

The ZT Systems acquisition boosts AMD’s profile in the AI market. By integrating ZT’s expertise in data center infrastructure, AMD can now offer complete AI solutions, encompassing hardware, software, and system-level integration. This move allows AMD to provide a comprehensive and integrated offering to clients seeking robust AI solutions.

“Our acquisition of ZT Systems is the next major step in our long-term AI strategy to deliver leadership training and inferencing solutions that can be rapidly deployed at scale across cloud and enterprise customers,” said AMD Chair and CEO Lisa Su in a statement. She also added that “AI is the most transformational technology of the last 50 years and our No. 1 strategic priority.”

Moorhead points out that this acquisition addresses two of AMD’s main competitive disadvantages in AI infrastructure: its software capabilities and its system scale and maturity. He believes that if executed well, this deal “will be an accelerant the company needs to drive parabolic revenue growth for both Instinct and head-node EPYC with the hyperscalers, tier-two CSPs and even some of the largest on-prem facilities.”

Significant investment and strategic focus on AI

Over the past year, AMD has invested more than $1 billion to improve its AI software capabilities and R&D activities, demonstrating its commitment to becoming a major player in the AI market. This investment, coupled with the acquisition of ZT Systems, positions AMD to compete more effectively with NVIDIA, who currently dominates the market. AMD has already made three small software tuck-in acquisitions (Silo AI, Nod.ai, and Mipsology) to bolster its mid- and high-level software abstractions and help customers customize LLMs.

The competitive landscape and revenue projections

NVIDIA currently controls an estimated 70% of the AI chip market share, according to Mizuho Securities. In terms of revenue, AMD’s projected data center GPU revenue for 2024 is $4.5 billion, significantly less than NVIDIA’s projected $104.7 billion for FY 2025, according to Visible Alpha. It’s not an apples-to-apples comparision though. The estimate for NVIDIA’s data center segment represents its entire data center segment revenue, which includes not just GPUs but also other data center products, while the figures for AMD represent GPU sales alone.

In its second quarter earnings, AMD announced that its data center segment revenue was up 115% year over year to a record $2.8 billion. Moorhead notes that the growth in AMD’s Instinct GPUs has been robust, going from $0 in the first half of 2023 to a $4.5 billion forecast for 2024.

Expanding engineering expertise and AI server development

The acquisition of ZT Systems brings an influx of talent to AMD, adding ZT’s 1,000 engineers to its ranks. This infusion of expertise is crucial for AMD’s development of competitive AI servers, enabling the company to challenge NVIDIA’s dominance in this market segment. “The AI infrastructure game is not just a chip game; it has become a more vertically oriented system and software game,” Moorhead said.

AMD plans to pay for 75% of the ZT Systems acquisition with cash and the remainder in stock. As of the second quarter, AMD had $5.34 billion in cash and short-term investments. The company expects ZT Systems to contribute to its adjusted financial performance by the end of 2025.

AMD plans to break off ZT Systems’ server manufacturing business and sell it once the deal closes, as it has no plans to compete with companies like Super Micro Computer.