Qualcomm is opening up to new market opportunities with AI.

Qualcomm (QCOM) will announce its fourth quarter earnings after the market close on Wednesday. This announcement comes as the smartphone chip giant aims to further diversify its business lines and enter the artificial intelligence data center market.

Last week, Qualcomm introduced its AI200 and AI250 data center chips and rack-scale server products. The AI200 is expected to launch in 2026, while the AI250 is planned for 2027. A third chip is anticipated to arrive in 2028.

A rack-scale server is a server system that can enhance performance capacity by aggregating computing resources from multiple chips. Nvidia (NVDA) offers its own rack-scale system, while Advanced Micro Devices (AMD) recently announced its own Helios rack-scale offering.

Qualcomm currently sells an AI chip, but this is its first step toward directly competing with Nvidia and AMD. This move caused Qualcomm's shares to rise by 11% during the announcement. However, Qualcomm shares have lagged behind competitors like Nvidia, AMD, and even Intel (INTC) throughout the year.

Over the past 12 months, shares have only increased by 8%, while Nvidia shares rose by 54%, AMD shares increased by 81%, and Intel shares went up by 70%, with the S&P 500 (^GSPC) gaining 19%.

According to Bloomberg consensus estimates, Qualcomm's earnings per share (EPS) for the quarter is expected to be $2.85, with projected revenues of $10.7 billion. The company reported an EPS of $2.69 and revenue of $10.2 billion for the same quarter in 2024.

Qualcomm derives a significant portion of its revenue from the sale of smartphone chips and licensing agreements for smartphone technologies. However, with smartphones becoming more prevalent worldwide, the market has slowed down over the years.

The company also faces the risk of losing a major customer like Apple (AAPL), which plans to use its own custom chips for the iPhone line. The company is already using these chips in the iPhone 16e and iPhone Air.

Entering the data center space provides Qualcomm access to a rapidly growing market, but this market is dominated by Nvidia and AMD.

BofA Global Research analyst Tal Liani noted in a message to investors, "This announcement emphasizes the need for Qualcomm to diversify away from the low-growth smartphone market, which accounts for approximately 75% of its CDMA Technology revenues, and targets a market expected to reach around $114 billion by 2030. Key customers are seeking supplier diversity independent of competitors like Nvidia," he said.

Qualcomm's QCT segment, which encompasses smartphones, the Internet of Things, and the automotive business, is expected to generate $9.3 billion in revenue, representing a 7.6% year-over-year increase. The QTL licensing segment is projected to produce $1.4 billion.

In addition to its data center efforts, Qualcomm is developing strategies to compete with Intel and AMD chips in the PC market with its processor series for Windows computers.

Bernstein analyst Stacy Rasgon mentioned in a note to investors that Qualcomm has not been favored due to its dependence on smartphone sales and customs concerns, but stated that she still believes the company offers significant value. "Along with a successful product portfolio and rising AI scenarios, we continue to see important opportunities," she said.