Since OpenAI released ChatGPT in November 2022, the AI industry has been characterized by a steadily growing need for computing power. This demand has taken various forms over the years.
First, huge data centers needed as many GPUs as they could find, causing a boom Nvidia (NASDAQ: NVDA) sales. Back then, GPUs required more and more high-bandwidth memory. In the age of agent AI, many developers see a growing need for CPUs like those from Intel (NASDAQ:INTC).
Did you miss Nvidia 2009? This rare signal flashes again. In 2009, a “double down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, the same “Total Conviction” signal is flashing for a company one hundredth the size of Nvidia. Carry on”
A company is seizing its opportunity and recently signed three large contracts with hyperscalers. Qualcomm (NASDAQ: QCOM) expects its data center chip business to grow to $15 billion by 2029 from virtually zero last year. And it’s off to a good start.
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The AI chip company is capturing a share of the data center market
Qualcomm announced back in April that it was developing a custom silicon solution with a leading hyperscaler and is expected to begin developing it later this year. At its investor day last month, management announced that it now has two hyperscalers under contract for at least $1 billion and has also struck a deal to begin selling its next-generation CPUs designed for AI agents Metaplatforms starting in the second half of 2028. Management now expects revenue of $5 billion from the data center business for fiscal 2027, rising to $15 billion by 2029.
The opportunity in data center CPUs is enormous compared to Qualcomm’s current business. Intel, for example, generated $5.1 billion in revenue from its data center and AI segment last quarter and $17 billion last year. And it has a multi-year lead in the data center CPU space.
Qualcomm expects the total addressable market for connectivity chips, custom chips, AI accelerators and CPUs in which it has a stake or is actively developing to exceed $1 trillion. And $15 billion is only 1.5% of that market, so that’s not a high bar.
Qualcomm’s trailing 12-month revenue is $44.5 billion, suggesting a significant growth opportunity for the company. As demand for on-device AI increases, the company also sees opportunities to expand its device CPU business.
However, it has to compete with Intel and more recently Nvidia in this regard. While selling chips directly will yield a lower operating margin than licensing the technology through the legacy wireless chip business, management sees significant leverage as the business scales, which should result in very strong earnings growth over the next few years.
Management expects earnings per share to rise to over $18 by 2029. This corresponds to an annual growth of 18% compared to expectations for the current year. The stock now trades for less than 18 times forward earnings expectations, making it a great opportunity for investors right now.
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Adam Levy holds positions at Meta Platforms and Qualcomm. The Motley Fool has positions in and recommends Intel, Meta Platforms, Nvidia, and Qualcomm. The Motley Fool has one Disclosure Policy.
This AI chip stock just closed massive deals with three hyperscalers and still looks like a good buy right now (note: not Nvidia or Intel). It was originally published by The Motley Fool
https://finance.yahoo.com/technology/ai/articles/ai-chip-stock-just-signed-085000284.html
