This Incredibly Cheap Artificial Intelligence (AI) Chip Stock Wants to Become the Next Broadcom

Broadcom has become one of the leading players in the artificial intelligence (AI) semiconductor market thanks to its expertise in application-specific integrated circuits (ASICs), which are custom processors designed for performing specific tasks.

The demand for these custom processors has been improving rapidly because of their ability to tackle AI workloads while keeping a handle on costs. As a result, several cloud hyperscalers are tapping Broadcom's custom chips and networking components to lower operating costs when running AI training and inference applications.

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This explains why Broadcom's growth has been outstanding in recent quarters. Moreover, a massive addressable revenue opportunity in the range of $60 billion to $90 billion suggests that it is at the beginning of a solid growth curve. Not surprisingly, even Qualcomm (NASDAQ: QCOM) wants a piece of this lucrative opportunity, and it has just made a move that could help it make a dent in the custom AI chip market.

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Qualcomm wants to get into AI data centers

Qualcomm has just announced that it is set to acquire British chip company Alphawave Semi for $2.4 billion with the aim to "further accelerate, and provide key assets for, Qualcomm's expansion into data centers." Alphawave's technology will allow Qualcomm to integrate high-speed connectivity into its AI chip platforms to enable rapid data transfer, which will in turn lead to higher computing performance and reduced power consumption.

Qualcomm believes that Alphawave's "products form a part of the core infrastructure enabling next generation services in a wide array of high growth applications, including data centers, AI, data networking and data storage." The chipmaker announced last month that it is set to reenter the data center market. The company is reportedly developing a custom AI chip platform using its Oryon central processing unit (CPU) and Hexagon neural processing unit (NPU) processors, which it claims are capable enough to meet AI inferencing workloads in data centers.

The latest acquisition is another piece of the puzzle as Qualcomm gears up for the launch of a data center-focused chip platform. The company has already announced that it is partnering with Saudi Arabia-backed AI venture HUMAIN to build AI data centers in that country, suggesting that Qualcomm could get a foot in the door and eventually make its presence felt in the huge custom AI processor market.

Importantly, there is space for another player in this market which is currently dominated by Broadcom with an estimated share of 70%. Marvell Technology controls the rest of this market. So, if Qualcomm can develop a cutting-edge product, it could end up becoming the third player here. That could give its business a big boost in the long run, considering the end-market opportunity on offer.

The valuation and the existing growth drivers make the stock worth buying

Qualcomm currently gets its revenue from selling chips that go into three product lines -- handsets, automotive, and the Internet of Things (IoT). All these segments are benefiting from the proliferation of AI. This explains why Qualcomm's top line in the second quarter of fiscal 2025 jumped 15% year over year to $10.8 billion, while adjusted earnings shot up 17% year over year.

The adoption of AI across these three markets is set to grow at a healthy pace. For example, AI adoption in the automotive market could grow at an annual rate of 37% over the next decade, while generative AI shipments are expected to increase at an annual rate of 78% through 2028. If Qualcomm is able to add another growth driver to its portfolio in the form of data centers, it won't be surprising to see it growing at a stronger pace in the long run.

That's why buying Qualcomm stock right now could turn out to be a smart thing to do, as it is trading at just 15 times trailing earnings.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Qualcomm. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a disclosure policy.