Issuing new shares is usually considered a recipe for souring sentiment as stockholders get diluted. But in this go-go artificial intelligence-crazed market, that logic has been turned upside down.
Just look at Intel Corp. Its shares have soared nearly 90% since the beginning of August as the money-losing chipmaker embarked on $18 billion of stake sales to the US government, SoftBank Group Corp. and Nvidia Corp. The deals are designed to strengthen Intel’s balance sheet with fresh capital.
That new equity also waters down the value of existing stockholders’ stakes by roughly 14%, according to Bloomberg calculations. Intel shareholders could face even more dilution if warrants held by the US government are exercised under certain conditions. But for now, investors are far more enthusiastic about the breathing room the cash represents than they are concerned about the diluted value of the individual shares.
“Investors are front-loading all this good news and really diminishing the real cost — with all of these stake sales there’s massive dilution,” said Michael Bailey, director of research at Fulton Breakefield Broenniman, which has $2.3 billion in assets under management. “It’s a plus and minus situation. Investors are betting that the plus is better than the minus.”
It’s the same with Intel rival Advanced Micro Devices Inc., which signed an agreement with OpenAI on Oct. 6 that could generate tens of billions of dollars in revenue. In turn, AMD gave the ChatGPT operator equity warrants that vest if certain milestones are met. AMD’s stock soared 43% in the three sessions following the announcement, even though future earnings-per-share will be less if OpenAI’s bet pays off.
Shares of both AMD and Intel were slightly lower in early trading Thursday.
The math behind the dilution is simple: Buying a share of a company essentially gives an investor a theoretical slice of its profits, which is represented as earnings per share. Profits don’t change when new stock is issued, but the portion attributable to each share shrinks. It’s the opposite of a stock buyback, which usually causes shares to rally as investors are entitled to claim a larger chunk of earnings due to the reduced number of outstanding shares.
Of course, selling stock generates cash, which was the entire point for Intel. The company is in the midst of a costly buildout of factories as it tries to transform into a contract chip manufacturer like Taiwan Semiconductor Manufacturing Co.
The problem is Intel may need to do more, since the capital it’s raising represents just over half of the roughly $30 billion required to build a new plant. That may be why it reportedly approached Apple Inc., one of its customers, about making an investment late last month. That report drove Intel shares up 21% in three sessions.
Something Is Better Than Nothing
“For shareholders, I think the math is: Would you rather have 80% or 70% of something, or 100% of nothing?” said analyst Jay Goldberg at Seaport Global, who recently raised his rating on Intel to neutral from sell. “There’s lots of fears about how can Intel survive, and they needed money, and investors are willing to take that dilution because this is the path to saving the company.”
On the flipside, the capital raises can paper over larger issues at the firms. Intel, for instance, needs to attract customers to its foundry business and until that happens any rallies driven by stake sales are “not sustainable,” HSBC analyst Frank Lee wrote in a note to clients last week in which he cut Intel’s rating to the equivalent of sell.
AMD’s situation is different. The chipmaker is growing fast — its net income more than tripled to $872 million in its most recent quarter, and its revenue jumped 32% to $7.7 billion. However, it occupies just a sliver of the market for graphics processing units used in AI computing compared with Nvidia, the industry leader.
So the deal with OpenAI was a big win for AMD’s AI accelerator operation. But the warrants contained an unusual twist. OpenAI will have the option to buy as many as 160 million AMD shares, or about 10% of its outstanding stock, at a penny apiece if certain financial and stock price milestones are reached. The warrants will vest in stages related to deployments of infrastructure based on AMD chips. AMD redacted other details of the conditions attached to the tranches, save for the final one which will be vested if the chipmaker’s stock hits $600. At that level it would be a $1 trillion company.
A representative for AMD declined to comment.
The deal came just weeks after Nvidia agreed to invest as much as $100 billion in OpenAI, which is undertaking a massive build-out of data centers equipped with Nvidia chips. But OpenAI also remains unprofitable. These kinds of financing arrangements have evoked memories of the dot-com era, when mutually beneficial transactions involving money-losing businesses made revenue growth appear more robust than it really was.
“There’s this unusual circular financing thing happening, and companies are finding creative ways to grow,” Fulton Breakefield Broenniman’s Bailey said. “Investors are doing the math and for the moment they’re comfortable with it. But if you look at the history of Wall Street, this is unusual.”
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