Amid the AI chip race, semiconductor specialist Qualcomm (NASDAQ:QCOM) almost seems like an afterthought. The focus is currently on graphics processors. Qualcomm, on the other hand, focuses on mobile and wireless technologies. However, Qualcomm’s strategic focus on energy efficiency and its new partnership to develop more efficient AI chips position Qualcomm to make a significant impact in the AI arena.
That’s why I’m bullish on QCOM stock for its potential to address the critical problem of energy consumption in AI applications.
Qualcomm teams up to offer a groundbreaking new chip
According to a Reuters In last month’s report, Ampere Computing disclosed that it had integrated its chips with Qualcomm semiconductor products in an effort to reduce energy bills associated with AI-related activities. According to the report, Ampere uses technology from ARM Holdings (NASDAQ:ARM) to manufacture central processing chips.
It is interesting to note that these chips are used by major companies like Oracle (NYSE:ORCL) and Google under parent company Alphabet (NASDAQ: GOOGL). It is tempting that Ampere – a startup – wants to make chips that are more energy efficient than what market leaders Intel (NASDAQ:INTC) and advanced micro devices (NASDAQ:AMD) produce.
“Qualcomm, which dominates the market for mobile phone chips, has been working since 2019 to break into the market for AI chips in data centers with its own energy-efficient offerings,” wrote Reuters contributors Stephen Nellis and Max A. Cherney.
The initiative fits neatly into Qualcomm’s long-term direction. The website states: “For more than a decade, Qualcomm engineers have been pioneering AI processing systems that put efficiency at the core. The systems, which harmonize our industry-leading hardware, software, algorithms and memory hierarchy toward AI acceleration, help reduce energy consumption and bring breakthrough improvements in energy efficiency, performance and latency.”
Of course, outright performance will always matter. But that also applies to sustainability. As Qualcomm rightly states, “More efficiency means less smartphone charging worldwide, making technology more sustainable – long a priority of this company.”
Focusing solely on semiconductor performance and not paying attention to sustainability could have damaging financial consequences. First, several companies have jumped on the sustainability bandwagon. Therefore, it would be incredibly hypocritical for them to promote products that put society in a worse ecological position than before.
Moreover, sufficient evidence shows that consumers consider sustainability important. If it becomes known that certain companies do not keep their word, that can be bad news. So QCOM stock is on viable footing as the underlying business moves beyond the low-hanging fruit of chasing straight semiconductor performance metrics.
Efficiency could be key for QCOM Stock
Earlier this year, The Washington Post read an alarming headline. With the country’s 2,700 data centers consuming more than 4% of the nation’s electricity by 2022, America will essentially run out of power. It’s not a clickbait concept either.
Other publications have noted that AI processes use as much energy as a small country. Moreover, this circumstance is likely to only worsen. The International Energy Agency estimates that based on its forecasts, global energy demand – driven by data centers, cryptocurrencies and AI – could represent as much electricity consumption as is currently used by Japan.
And we’re not talking about a specific industry in Japan. On the contrary, we are talking about the entire country.
Paul Hoffman wrote an excellent article on TipRanks about the broad implications of AI energy consumption. Hoffman cites the nuclear energy sector in particular as one of the main beneficiaries. In the context of AI-related consumption, “nuclear energy, with its newfound appeal thanks to low CO2 emissions and 24-hour reliability, appears ideally positioned to meet the skyrocketing energy needs driven by AI,” Hoffman wrote.
As for QCOM stock, the technology industry will have to come up with viable solutions to address the energy consumption problem. That’s the vulnerability that could impact the usual suspects in the AI business. It’s great that digital intelligence is expanding and can deliver several efficiencies. However, if the costs of innovation become too high, this dynamic can become self-defeating.
Fortunately, with Qualcomm working on its efficiency-oriented directive, Qualcomm can put forward a solution that is the best of both worlds: incredible computing power while being environmentally friendly. I don’t think it’s a coincidence that QCOM shares are up almost 43% since the beginning of the year.
A compelling valuation strengthens the bullish case
Finally, we need to talk about valuation. Currently, QCOM stock is trading at a current year earnings multiple of 27.43x and a forward multiple of 20.62x. Whether compared to the semiconductor equipment and materials category or the broader semiconductor sector, Qualcomm is undervalued. The former category has an average multiple of 31.4x, while the latter is 34.8x.
Where things get a little heated is in the sales department. Currently, QCOM shares are trading at 6.32x prior-year sales. That’s higher compared to both semiconductor categories, which are each about 4.3x. However, with Qualcomm’s efficiency guidance, the premium can actually be discounted relative to the long-term upside potential.
Is QCOM Stock a Buy According to Analysts?
As for Wall Street, QCOM stock has a consensus rating of Moderate Buy, based on 19 Buys, eight Holds, and one Sell rating. QCOM’s average price target is $198, implying a 3.1% downside risk.
The Takeaway: QCOM Stock Could Make a Big AI Entry
While other tech companies have embraced AI innovation, Qualcomm has taken a different approach, with an emphasis on sustainable digital intelligence. Although this approach is not that exciting, it is perhaps the most relevant. As many sources have pointed out, AI consumes too much energy and something needs to be done. Qualcomm may offer a viable solution, making QCOM stock worth considering.
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