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On Monday, Truist Securities has maintained its Hold rating on shares of AMD (NASDAQ: AMD), with a steady price target of $156. The acquisition of ZT by AMD, valued at $4.9 billion, will be financed with a combination of 75% cash and 25% stock.
AMD plans to fund the cash portion through new short-term debt. Following the acquisition's completion, AMD intends to reclassify ZT's significant manufacturing assets as "Held for Sale" while searching for a strategic buyer for the business, which generates approximately $10 billion in revenue.
AMD will keep ZT's design segment, which includes around 1,000 engineers, incurring an operational expense (OpEx) of roughly $150 million annually, with minimal to no sales expected. The analyst anticipates that the new OpEx, interest from the new debt, and the impact of share dilution could lead to an approximate 20 cents reduction in annual earnings per share (EPS). However, if the manufacturing assets are sold quickly and the integration of more complex hardware platforms accelerates, the transaction could become modestly accretive by the end of 2025.
The strategic move by AMD to separate and sell ZT's manufacturing operations while retaining its design team aligns with its focus on design capabilities. The company's decision to classify the manufacturing assets as "Held for Sale" indicates a prompt effort to find a buyer. This sale is crucial for offsetting the acquisition costs and the additional operational expenses stemming from the newly acquired design team.
AMD's strategy to quickly divest the manufacturing assets and ramp up revenue from integrated hardware platforms is anticipated to mitigate the initial financial impact and potentially add value to the company by the end of 2025. This long-term perspective on the acquisition's benefits highlights the company's focus on growth through strategic asset management and development of its design capabilities.
In other recent news, Advanced Micro Devices (NASDAQ:AMD) has reaffirmed its buy and overweight ratings from Stifel, TD Cowen, and Wells Fargo, with price targets of $200, $210, and $190 respectively, following the announcement of its $4.9 billion acquisition of ZT Systems. The acquisition, a blend of cash and stock, is set to bolster AMD's server and AI data center capabilities. Post-acquisition, AMD plans to divest ZT Systems' manufacturing business which accounted for nearly all of the company's $10 billion revenue in the previous year, retaining 1,000 engineers from the company.
The move is expected to add around $150 million in operational expenses, resulting in a roughly 1.5% dilution in earnings per share. Analysts from Wells Fargo, Deutsche Bank, and Wolfe Research suggest that the acquisition could strengthen AMD's competitive position in the AI market. In addition, AMD has completed the acquisition of Europe's largest private artificial intelligence laboratory, Silo AI, for approximately $665 million.
On the financial front, AMD reported Q2 revenues of $5.835 billion, surpassing Street consensus by $110 million, with the data center segment recording a 115% growth to $2.8 billion. These recent developments underscore AMD's strategic focus on AI and its ongoing efforts to expand in the rapidly evolving AI market.
InvestingPro Insights
In light of AMD's recent acquisition and strategic maneuvers, it's important to consider the company's current financial health and market performance to understand the potential impacts of these decisions. According to real-time data from InvestingPro, AMD boasts a robust market capitalization of $250.96 billion, underscoring its significant presence in the market. Despite a high P/E ratio of 185.01, indicating a premium on its earnings, the company has experienced commendable revenue growth in the last twelve months, with a 6.4% increase to $23.28 billion. Moreover, AMD's gross profit margin remains strong at 51.42%, reflecting efficient operations and cost management.
InvestingPro Tips highlight AMD's volatile stock price movements, which investors should monitor closely given the company's ambitious growth plans. Additionally, analysts have revised their earnings expectations downwards for the upcoming period, suggesting that the market is still assessing the potential outcomes of the acquisition. However, it's noteworthy that AMD is expected to remain profitable this year, as indicated by the positive net income growth forecast.
For investors seeking a more comprehensive analysis, InvestingPro offers 15 additional tips on AMD, which can be found on their platform. These tips provide deeper insights into AMD's financial health and market position, helping investors make more informed decisions in the context of AMD's recent strategic developments.
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