Qualcomm (NASDAQ:QCOM) President Cristiano Amon recently denied rumors that the chipmaker would either sell or shutter its fledgling server chip unit. Speaking to Reuters, Amon said: "We are not looking at strategic options. We are not selling. We are still focused on it."

Amon said that Qualcomm would instead roll its server chip business into its CDMA Technologies unit, which designs and sells mobile chipsets, to cut costs. Amon noted that the restructured unit would focus on selling chips to large cloud computing players, particularly Chinese tech giants like Baidu, Alibaba, and Tencent.

Servers in a data center.

Image source: Getty Images.

Cutting costs makes sense since server chips aren't a core business for Qualcomm. But it also raises eyebrows, since Qualcomm should probably increase its investments in the server unit if it wants to dent Intel's (NASDAQ:INTC) 99% share of the market. While Qualcomm isn't ready to give up on data centers yet, investors shouldn't get too excited about its future in server chips.

Why did Qualcomm enter the data center market?

Qualcomm generates most of its revenue from sales of mobile chipsets, and most of its profits from licensing fees for its wireless technologies. Its mobile chipset business faces tough competition from cheaper rivals like MediaTek and first-party chipsets from OEMs like Huawei. Its licensing business, meanwhile, is besieged by OEMs and regulators that argue that its licensing fees (up to 5% of the wholesale price of each phone) are too high.

To diversify its business away from the mobile market, Qualcomm launched chipsets for adjacent markets, including Internet of Things (IoT) devices, connected cars, and data centers. In the data center market, many major tech companies are seeking cheaper alternatives to Intel's flagship Xeon chips as the growth of cloud services, streaming media, and other online services bolster demand for more powerful servers.

ARM-based chips, which marginalized Intel's x86 chips in the mobile market, have long been considered a power-efficient alternative to Intel's Xeons in data centers. Yet many earlier ARM-based server chips, like AMD's (NASDAQ:AMD) A-Series Opteron processors, fell short in head-to-head comparisons against Xeons. Most applications were also optimized for x86 processors instead of ARM processors.

Two people walk through a data center.

Image source: Getty Images.

That's why Qualcomm focused heavily on horsepower with its Centriq 2400-series data center chips. Qualcomm claimed that the 48-core Centriq 2460 offered a four-fold boost in performance per dollar against Intel's Xeon Platinum 8180, and several major tech companies -- including Samsung, Hewlett-Packard Enterprise, and Alibaba -- started testing out Qualcomm's chips. Qualcomm also worked with Microsoft to port Windows Server to ARM chips.

Why Qualcomm faces an uphill battle

Unfortunately, many companies are probably reluctant to buy Centriq chips for two reasons. First, larger companies would still need to customize their internal software for ARM-based chips, which could be a costly and buggy transition. Smaller companies, which mostly use off-the-shelf software designed for x86 chips, would need to install ARM-based software instead.

Second, AMD's (NASDAQ:AMD) Epyc server chips are more attractive alternatives to Intel's Xeons than Qualcomm's Centriqs. Epyc chips are built on the same x86 architecture as Xeons, which cause less software headaches for data center administrators, while providing faster performance in memory-intensive applications. AMD also recently announced its second-generation Epyc chips, which will officially launch next year.

Intel realizes that it will lose market share in data centers to AMD in the near future. Then-CEO Brian Krzanich recently told Instinet analyst Roman Shah that Intel's job was to merely prevent AMD from capturing a 15% to 20% share of the data center market, rather than preserve its near-monopoly. Therefore, investors looking for a viable underdog in the data center market should focus on AMD instead of Qualcomm.

 

Leo Sun owns shares of Baidu and Tencent Holdings. The Motley Fool owns shares of and recommends Baidu and Tencent Holdings. The Motley Fool owns shares of Qualcomm. The Motley Fool has a disclosure policy.