By Adam Clark

Qualcomm and Arm Holdings executives are the latest to say the prospect of low-cost artificial intelligence is a good thing. The two chip companies have a decent argument, but they need sales of AI smartphones to take off.

Practically every chip and technology company to report results this earnings season has said that DeepSeek's demonstration of low-cost AI development is actually a good thing for the sector, even though a panic about the Chinese startup's advances wiped away nearly $1 trillion of value from the U.S. stock market.

Qualcomm, a specialist in chips for mobile phones, and the semiconductor-design company Arm have a better argument than most. Both companies should benefit from more computing moving from the cloud onto devices, a way of operating known as "edge AI." More efficient AI models bring that future closer.

Qualcomm CEO Cristiano Amon told analysts on an earnings call Wednesday that DeepSeek models were running on smartphones and personal computers powered by the company's chips within a few days of its release. "DeepSeek-R1 and other similar models recently demonstrated that AI models are developing faster, becoming smaller, more capable and efficient, and now able to run directly on device," Amon said.

That is a shift that can't come quickly enough for Qualcomm, whose stock performance has trailed far behind peers such as Nvidia that provide chips to power AI data centers. The hoped-for boost to smartphone sales that edge AI could bring has been slow to arrive, and handset-related revenue makes up the majority of Qualcomm's business.

In Qualcomm's favor, its handset revenue rose 13% in the first quarter. That is way above the 2.4% overall growth in global phone shipments in the last quarter of 2024, as estimated by International Data Corporation.

"Like Apple, Qualcomm is seeing an uptick in its premium tier with those handset makers that introduced AI-related features. However, the impact of this positive trend could be a little more muted in 2H25 as we prepare for the loss of Apple content in the September quarter and beyond," wrote Melius Research analyst Ben Reitzes in a research note.

Beginning this fall, Apple will begin to substitute 5G chips of its own making for those made by Qualcomm.

Reitzes kept a Hold rating on Qualcomm stock but raised his target price to $190 from $180. Qualcomm shares were down 4.9% at $167.28 in morning trading.

Meanwhile, Arm CEO Rene Haas told analysts that DeepSeek's demonstration of cheaper AI was "terrific" for the company in its own earnings call.

"As wonderful a product as [Nvidia's] Grace Blackwell [chip] is, you'd never be able to put it in a cellphone, you'd never be able to put it into earbuds. You can't even put it into a car. But Arm is in all those places," Haas said.

Arm isn't quite as dependent on smartphones as Qualcomm. Although it does plenty of business licensing its designs for handsets, it also has a growing position in high-end cloud-server processors and in AI-enabled PCs. Still, more AI smartphone sales would promote the use of Arm's latest advanced chip technology, called Armv9, which generates double the royalty rates of the previous version.

"We...view the emergence of AI Agents and efficient AI models (such as DeepSeek) as a significant positive for ARM given its strong presence at the edge," wrote Raymond James analyst Srini Pajjuri in a research note.

Pajjuri raised his target price on Arm to $175 from $160 and kept an Outperform rating on the stock.

Write to Adam Clark at adam.clark@barrons.com

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February 06, 2025 12:14 ET (17:14 GMT)

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