Qualcomm is making a big push into data center chips, but the investment is coming at a cost. RBC Capital Markets warns that the company's heavier spending on AI accelerators and CPU platforms will squeeze profit margins in the near term, even as Qualcomm aims to generate $5 billion in data center revenue by fiscal 2027.
The trade-off is a familiar one in the chip industry: spend now to earn later. Qualcomm's latest outlook and commentary underscore that dynamic, with the company's own CFO, Akash Palkhiwala, saying its chip unit, Qualcomm CDMA Technologies (QCT), already expects a three-percentage-point hit to its gross margin from these investments.
Why margins are under pressure
Qualcomm is best known for making the processors that power most Android smartphones. But the company has been trying to diversify beyond phones, and data centers are a key part of that strategy. It's designing custom chips for hyperscale cloud providers like Amazon Web Services (AWS), hoping to carve out a niche in the booming market for AI infrastructure.
That push requires significant upfront spending on research, design, and manufacturing. RBC analyst Srini Pajjuri flagged "near-term margin headwinds" in a note to clients, reflecting the costs of ramping up new platforms.
Management says it's raising prices to offset higher component costs, but the full benefit won't show up in QCT's gross margins until the second half of fiscal 2027. That means investors should expect some margin softness in the meantime.
Big targets, big competition
To show progress, CEO Cristiano Amon said data center revenue should top $650 million in the December quarter, with shipments to two hyperscaler customers tied to custom silicon work, including AWS. The longer-term targets are much bigger: $5 billion in fiscal 2027 and $15 billion in 2029.
But RBC warns that competition in custom chips is intense. Companies like Broadcom and Marvell are also chasing the same hyperscaler deals, and the market is crowded. That competition could limit Qualcomm's ability to win contracts and maintain pricing power.
The analyst trimmed his fiscal 2027 adjusted earnings-per-share (EPS) estimate to $10.28 from $10.57, while keeping a $180 price target and a "sector perform" rating. That's a modest cut, but it reflects the margin pressure the company is facing.
What it means for investors
For everyday investors, the key takeaway is that Qualcomm's data center story is a long-term bet. The company is sacrificing some near-term profitability to position itself in a market that could pay off down the road. But that means the stock's valuation may depend more on future growth than on current earnings.
RBC's math illustrates the point. With a $180 price target and $10.28 in fiscal 2027 EPS, the implied price-to-earnings ratio is about 17.5 times. If ongoing data center spending leads to more EPS cuts, that multiple would climb, making the target harder to defend unless investors are willing to pay up for the long-dated data center story.
This is a common pattern for companies investing heavily in AI infrastructure. The recent selloff in AI-related stocks shows how sensitive the market can be to signs that spending isn't translating into profits quickly enough.
For Qualcomm, the next few quarters will be a test. If data center revenue ramps as promised and margins recover in the second half of fiscal 2027, the strategy could pay off. But if competition intensifies or the AI buildout slows, the stock could face more pressure.
Investors should also keep an eye on the broader data center landscape. Some big tech companies are pulling back on data center deals, and regulatory hurdles could stall some projects. That could affect demand for Qualcomm's chips.
For now, Qualcomm is betting that the long-term opportunity outweighs the near-term pain. Whether that bet pays off will depend on execution and the health of the AI data center boom.
