AMD’s AI Play: A Strategic Masterstroke to Overtake Nvidia in the Data Center Race

AMD’s $3 billion sale of ZT Systems’ manufacturing arm to Sanmina marks a pivotal shift in its strategy to dominate the AI-driven data center market. By offloading low-margin production and retaining its engineering crown jewels—experts valued at an estimated $1.33 million per engineer—AMD is positioning itself to accelerate the adoption of hyperscaler GPUs and challenge Nvidia’s entrenched dominance. This move isn’t just about cost-cutting; it’s a calculated reallocation of resources to seize the $500 billion AI hardware boom.

The Divestiture: A Bold Bet on Margin Expansion

AMD’s sale of ZT’s manufacturing division to Sanmina—a global leader in cloud infrastructure production—strikes a critical balance. The transaction, including up to $450 million in performance-linked payments, frees up capital while ensuring seamless manufacturing for high-growth AI systems. Crucially, AMD retains ZT’s engineering teams, whose expertise in rack-scale AI architectures and liquid cooling technologies is irreplaceable.

This strategic trade-off is clear: manufacturing is now Sanmina’s domain, while AMD focuses on design, customer enablement, and R&D. The result? A leaner, faster path to market for AI solutions tailored to hyperscalers like Amazon, Microsoft, and Google.

Engineer Retention: The $1.33M/Engineer Edge Over Nvidia

AMD’s decision to retain ZT’s engineers—despite selling the manufacturing arm—signals its commitment to out-innovate Nvidia. These teams are critical to developing open-ecosystem AI systems, which are “ready-to-deploy at scale” and compatible with diverse cloud environments. At an estimated $1.33 million per engineer (factoring in salaries, retention bonuses, and future performance incentives), this investment buys AMD a direct line to cutting-edge AI infrastructure.

Nvidia, by contrast, relies on a vertically integrated model. AMD’s partnership with Sanmina flips this script: engineers design revolutionary systems, while manufacturing is outsourced to a partner with hyperscaler-scale capacity. This split positions AMD to undercut Nvidia’s margins while matching its technical prowess.

Financials: Growth Amid Regulatory Headwinds

AMD’s Q1 2025 results underscore the strategy’s early success:
- Revenue surged 36% YoY to $7.4 billion, driven by a 57% jump in data center sales (EPYC CPUs and Instinct accelerators).
- Gross margin expanded to 54%, reflecting a richer product mix and cost discipline.
- Cash reserves hit $7.3 billion, fueling $749 million in buybacks and R&D reinvestment.

Yet challenges loom. U.S. export controls on MI308 chips to China could slash annual revenue by $1.5 billion—a hit AMD is mitigating by accelerating partnerships with U.S.-based hyperscalers and European cloud providers.

Valuation: Citi Sees a 42% Upside—Why Now?

Citi’s $162.56 12-month price target (vs. AMD’s current $128.90) hinges on two factors:
1. Margin Expansion: Retaining engineers while outsourcing manufacturing should boost operating margins to 25%+ by .
2. AI Adoption Surge: Hyperscalers are doubling down on AMD’s open-ecosystem solutions to avoid vendor lock-in.

Analysts also highlight AMD’s strategic capital allocation:
- Buybacks: $6 billion authorized to capitalize on undervalued stock.
- R&D Focus: Investments in liquid cooling and AI chip design (with ZT’s engineers) aim to close the performance gap with Nvidia’s H100.

The Investment Case: Why AMD Wins the AI Hardware Race

AMD’s move isn’t just about cost-cutting—it’s a masterclass in long-term competitive positioning:
- Margin Optimization: Offloading manufacturing to Sanmina could add 400 basis points to gross margins by .
- Hyperscaler Traction: Partnerships with cloud giants, enabled by ZT’s engineering talent, are locking in multiyear contracts.
- Valuation Multiplier Expansion: As AI revenue scales, semiconductor multiples for AMD could rise to 25x forward EPS (vs. 20x today), aligning with software peers.

Risks and the Call to Action

Risks remain, including export controls and Nvidia’s relentless innovation. Yet AMD’s strategic pivot addresses its key weakness—time-to-market—and leverages its strength: open-ecosystem flexibility.

For investors, this is a rare opportunity: a semiconductor leader with a clear path to margin expansion, AI dominance, and a 40% upside. The question isn’t whether AMD can overtake Nvidia—it’s when.

Act now: AMD’s strategic reallocation of resources is a blueprint for the AI era. With cash reserves bulging and execution accelerating, this is a buy at $128.90. The next $35 is already in sight.