JP Morgan analyst Samik Chatterjee maintained an Overweight rating on Qualcomm Inc ( QCOM ) on Monday.

Chatterjee noted that Qualcomm ( QCOM ) is evaluating the potential acquisition of Alphawave. The current deadline for providing an update on its intent to make an acquisition offer is May 27.

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While the potential acquisition will have a negligible impact on financials, the analyst noted that the possible acquisition of Alphawave has higher strategic importance for Qualcomm ( QCOM ), which has recently more explicitly outlined its intent to pursue the data center market as another pillar of growth and diversification.

Industry reports highlight the data center CPU TAM to be positioned to expand at a 10% CAGR, the AI inference market to expand more than a 20% CAGR, and a potential acquisition of Alphawave and its capabilities regarding data center connectivity IP would complement its earlier acquisition of Nuvia and its capabilities in relation to designing data center CPUs as well as AI inference chips based on custom ARM cores, Chatterjee said.

The broader capabilities beyond Compute, extending into Connectivity, will also allow Qualcomm ( QCOM ) to leverage a similar playbook that it has adopted about its successful entry and scaling in end-markets like Autos and IoT where the breadth of the capabilities has been a key differentiation relative to more focused semiconductor companies, allowing Qualcomm ( QCOM ) to gain share despite being a relatively new and in some cases a late entrant looking to leverage an emerging insertion point in a mature industry, as per the analyst.

Chatterjee noted that recently, Qualcomm ( QCOM ) announced the engagement with HUMAIN in Saudi Arabia to support custom CPUs compatible with Nvidia’s GPUs and AI infrastructure through AI inferencing chips.

The analyst said Alphawave is vertically integrated, with capabilities spanning from Design IP to chips. Some of the company’s named customers are Taiwan Semiconductor Manufacturing Co ( TSM ) , Samsung Electronics ( SSNLF ) , Intel Corp ( INTC ) , and Rebellions, as well as an unnamed North American hyperscaler.

Chatterjee said the breadth of capabilities that Alphawave can add to Qualcomm’s portfolio will position the company to benefit from tailwinds related to strong growth in Custom silicon and ASIC adoption within AI infrastructure and growth in content related to connectivity products within AI data centers.

At its Capital markets day, Alphawave outlined expectations for the High-Performance IP TAM to expand at a 21% CAGR from 2024 through 2027, Custom Silicon to expand at 23%, Connectivity Products at 31%, and Chiplets at 65% over the same period. Led by the above growth drivers, Custom Silicon is expected to be 70%+ of the total TAM by 2027, which is estimated in aggregate to be close to $39 billion by 2027, he said.

The analyst added that Alphawave’s immediate contribution to Qualcomm’s financial performance is unlikely material, but the company expects synergies from its entry into the broader data center TAM.

Given Alphawave’s relatively small size and Qualcomm’s strong balance sheet, Chatterjee expects the acquisition to be modestly accretive even when assuming a significant premium to Alphawave’s valuation in the public markets before Qualcomm ( QCOM ) disclosed interest.

Price Action: QCOM stock is up 2.48% at $148.96 at last check Tuesday.

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