Advanced Micro And Global Foundries Amend Supply Deal

Advanced Micro Devices Inc. (NASDAQ:AMD) recently announced that it has inked an agreement with Global Foundries to make some amendments to its already existing Wafer Supply Agreement (WSA).

The Agreement in Details

The agreement, in force from Jan 1, 2016 to Dec 31, 2020, delineates a collaborative framework between the two companies for manufacturing the 7nm node. With this announcement, Advanced Micro has positioned itself to manufacture certain products with the help of another foundry.

The agreement also elaborates on annual targets for wafer purchase as well as setting of prices from 2016 till the end of 2020.

Advanced Micro will make a total payment of $100 million in cash to Global Foundries following the new terms. The company will make the payment in installments beginning from the fourth quarter of 2016 to the end of the third quarter of 2017.

Moreover, Advanced Micro will make quarterly payments to Global Foundries starting from 2017 against certain wafers manufactured by a third party supplier.

Further, the agreement also entails (through a warrant) Mubadala, the parent company of Global Foundries to buy 75 million shares of Advanced Micro at $5.98 per share.

The warrant may be exercised in whole or in part prior to Feb 29, 2020. However, it limits Mubadala’s beneficial ownership to 19.99% of Advanced Micro’s outstanding shares.

Due to the $100 million payment and warrant issue (worth $235 million), Advanced Micro expects to record a one-time accounting charge in the third quarter of 2016.

Our Take

We note that Advanced Micro Devices, being a fabless semiconductor company, is distributing its manufacturing load to multiple suppliers. This may be due to the supply chain concerns the company is facing over 14nm Polaris based graphics cards.

We believe that expansion of the supplier base will enable the company to lower costs and maintain a smooth supply chain.

ADV MICRO DEV Price

Zacks Rank & Stocks to Consider

At present, Advanced Micro has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology space are Alpha & Omega Semiconductor, Ltd. (NASDAQ:AOSL) , Amkor Technology, Inc. (NASDAQ:AMKR) and AXT Inc. (NASDAQ:AXTI) , each sporting a Zacks Rank #1 (Strong Buy).

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