On Monday, Wells Fargo (NYSE:WFC) reiterated an Overweight rating on shares of Advanced Micro Devices (NASDAQ:AMD), maintaining a $190.00 price target. The firm's analysis follows AMD's recent announcement of its acquisition of ZT Systems, a leading supplier of hyperscale server solutions for cloud computing and AI, for $4.9 billion. This deal includes a $400 million earnout and is structured with 75% cash financing—partly through new debt—and 25% stock.
ZT Systems, which has manufacturing and service operations in the U.S. and Europe, reported a revenue run-rate exceeding $10 billion over the past 12 months, primarily from its manufacturing segment. AMD plans to divest this segment within 12 to 18 months after the deal closes in the first half of 2025. The company intends to retain 1,000 engineers out of ZT's 2,500 total employees, with associated operating expenses around $150 million.
The acquisition is anticipated to be accretive to AMD's non-GAAP earnings per share by the end of fiscal year 2025. This is as AMD aims to boost GPU and CPU sales to counterbalance the incremental costs incurred from the deal. The manufacturing business will be classified as held for sale in discounted operations.
Wells Fargo's assessment highlighted the acquisition's potential to enhance AMD's offerings, including system and software capabilities. However, the firm noted that while the manufacturing asset's value wasn't specified, it could potentially fetch a few billion dollars.
The new debt incurred is expected to be temporary until the manufacturing business is sold, although AMD's leverage remains lower than its peers, suggesting some debt may remain.
The report also pointed out that the true value of the deal might be overshadowed by the difficulty in quantifying the exact increase in GPU sales attributable to the acquisition.
Despite this, Wells Fargo views the acquisition as a strategic move to compete more effectively in system and rack/data center level solutions, even as AMD continues to face a gap in the networking segment.
InvestingPro Insights
Advanced Micro Devices (AMD) has garnered attention with its recent acquisition of ZT Systems and the strategic moves to enhance its market position. According to InvestingPro data, AMD boasts a substantial market capitalization of $246.48 billion, reflecting its significant presence in the industry. The company's P/E ratio stands at 181.66, indicating a high earnings multiple, which aligns with the InvestingPro Tip that AMD is trading at a high earnings multiple. This could suggest that investors have high expectations for the company's future growth and profitability.
InvestingPro Tips also reveal that AMD's net income is expected to grow this year, providing a positive outlook on the company's financial performance. Additionally, AMD's stock has experienced a significant return over the last week, with a 1 Week Price Total Return of 8.62%. This short-term performance, coupled with the anticipation of net income growth, may offer investors a sense of optimism regarding AMD's future prospects.
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