Investing.com -- Jefferies has upgraded Alphawave Semi to a ’buy’ rating, raising its target price from 108p to 160p, following Qualcomm’s announcement that it is considering making an offer for the semiconductor firm.

Qualcomm (NASDAQ: QCOM ) has until April 29 to either submit a formal bid or walk away, as per UK takeover regulations. While a firm offer is not guaranteed, Jefferies analysts believe a bid is likely, given Alphawave’s strong intellectual property portfolio and its growing presence in AI and data centre applications.

Alphawave specializes in high-speed connectivity solutions, including 224G SerDes, Ethernet, PCIe, CXL, and Die-to-Die connectivity. It also has expertise in PAM4 and Coherent (NYSE: COHR ) DSP, with its technology already adopted by multiple clients, including a major hyperscaler, believed to be AWS.

The company has been expanding its custom silicon business, particularly in AI-driven data centre applications.

For Qualcomm, acquiring Alphawave would provide an entry into this growing market, complementing its broader diversification strategy beyond smartphones into PCs and automotive chips.

Key competitor MediaTek has already seen success in AI-related custom ASIC programs, making such a move logical for Qualcomm.

Despite Alphawave’s recent share price rally following Qualcomm’s announcement, Jefferies analysts argue that the stock remains undervalued.

Alphawave is currently trading at 2.9x its estimated FY26 EV/sales and 25x its FY26 price-to-earnings ratio (PER), much lower than comparable firms.

Peers such as Credo are trading at much higher multiples, with a 33x PER and 9.7x EV/sales.

A broader peer group in the U.S., including companies like Marvell (NASDAQ: MRVL ), Interdigital, CEVA (NASDAQ: CEVA ), and Astera Labs, trades at an average FY26 EV/sales multiple of 7.9x and a PER of 35x.

Alphawave’s discount can be attributed to past financial disappointments, with revenue and margin trends falling short of expectations.

The outlook for FY25 is also expected to be weaker than previously guided. However, the company has demonstrated strong revenue growth, with a 51% compound annual growth rate (CAGR) between FY21 and FY24, and double-digit growth is expected to continue.

Jefferies’ previous ’hold’ rating was based on concerns that Alphawave needed to stabilize its financial performance before achieving a valuation re-rating.

Although analysts acknowledge that further estimate reductions for FY25 and FY26 may still be necessary, they now believe the potential for mergers and acquisitions (M&A) activity is enough to re-rate the stock.

There is also the possibility of counter bids or Alphawave’s board pushing for a higher offer.

Jefferies has outlined several potential scenarios for Alphawave’s stock. In a base case scenario, the stock could see a 71% upside, with revenues for 2025 falling below the current $450 million guidance and an adjusted EBITDA margin in the high teens.

A bid from Qualcomm would support the stock, while custom silicon orders remain strong, even if near-term silicon-related orders are soft. In a more optimistic scenario, where multiple bidders emerge and Alphawave’s silicon-related orders pick up, the stock could rise by 103% to 190p.

In this case, the company would approach its previous $450 million revenue guidance, and corporate governance and balance sheet concerns would subside. On the downside, if Qualcomm decides not to proceed with an offer and no other bidders emerge, Alphawave’s stock could fall by 32% to 64p.

A weaker-than-expected earnings report or equity issuance leading to an 18% dilution would also contribute to this decline.

Jefferies sees strong demand for Alphawave’s IP, custom silicon, and connectivity products, particularly as AI adoption accelerates.

The ongoing trend of vertical integration among hyperscalers, cloud service providers, and OEMs in industries like 5G and automotive is another key growth driver.

Even if a bid from Qualcomm does not materialize immediately, Jefferies believes Alphawave’s stock is likely to trade at a higher multiple due to continued M&A interest and its positioning in high-growth markets.