QCOM is an attractive buy with 67% upside over 12-18 months due to cheap valuation and data center growth potential.

A few days ago on August 26th, Qualcomm reminded investors of its ambition for gaining market share inside the data centers updated for artificial intelligence. The company said its high-bandwidth compute HBC, its first generation, is slated for commercial shipment in 2027.

So, given the company's success in expanding outside its core competency, which is smartphones, and its success in automotive and computers, should investors be excited about Qualcomm's ambitions in data centers?

And is Qualcomm's stock a buying opportunity amid this expansion?

So, over the years Qualcomm has done an excellent job expanding sales. I mentioned its core category is smartphones. It's done a great job expanding into the automotive segment and more recently it's done a great job expanding into the laptop and personal computer segment.

So, given its success investing outside of its core competency, it's reasonable to assume that Qualcomm will gain meaningful market share in the data centers and that's an industry that's booming with an estimated $1.2 trillion of spending in 2027 and likely more in 2028.

Qualcomm's [snorts] revenue has doubled from $22 billion in 2017 to $44 billion over the trailing 12-month period.

That said, while Qualcomm's revenues have more than doubled or roughly doubled in the previous decade. Its operating profit margins have been volatile and trending downward. In 2017, it boasted an operating profit margin of 29%.

More recently, it boasted an operating margin of 23 and 1/2%.

So, all of that research and development expense to expand outside of its core competency has cost the company profitability. Now, with expansions into the data center market, it's reasonable to assume that its operating margin will trend lower before moving higher after and if it achieves success in the data center market.

Similarly, its returns on invested capital have been volatile, but this metric has trended upward. At 23%, it's roughly two times the company's weighted average cost of capital and roughly double where it was in 2017.

So, given the company's increasing investments in research and development, it's nice to see that the management team has been relatively effective at allocating capital.

Qualcomm's valuation is relatively cheap because it faces near-term headwinds and the benefits of its investments in expanding into the data center are not likely to come to fruition until maybe the second half of 2027 and the first half of 2028.

And those are just the initial ramping stages. It'll likely take more time for those segments to reach maturity and be a meaningful contributor to the company's top and bottom line.

Meanwhile, in the near-term, there are significant headwinds in its core category, the smartphone industry. Higher prices for memory and storage are causing significant decreases in the number of units sold of smartphones in 2026.

That's likely to persist for the rest of this year and probably even throughout 2027 as data centers are absorbing a large percentage of the capacity available for memory and storage.

And so, that's leaving the smartphone industry with leftovers.

Qualcomm is trading at a forward price to earnings of 16.6. I also calculated a fair value of the business and I came to the conclusion that it's worth $283 compared to the current market price of $170.

Given that difference, I've calculated a 67% upside for Qualcomm stock over the next 12 to 18 months.

The upside is likely to be captured towards the later end of that 12 to 18-month period. As I mentioned, the product releases for the data center are unlikely to happen until 2027-2028.

But as we get closer, we're likely to see more announcements from the company about those upcoming production ramps and perhaps deals signed with some of the large hyperscalers like Microsoft, Amazon, and Alphabet, in addition to Meta Platforms.

But the hyperscalers are more interested in disaggregating their solutions, going with several vendors and several providers including using their own proprietary chips, partnering with Broadcom, Qualcomm, and etc. in order to develop their entire computing stack.

That being said, given the relatively cheap valuation whether I'm measuring on a forward price to earnings basis or whether I'm measuring using my discounted cash flow basis, Qualcomm stock looks like an attractive stock buying opportunity where I have a relatively high conviction, relatively high confidence level on this ranking.