Shares of MediaTek closed 10% higher on Tuesday after the Taiwanese chip firm announced a partnership with Nvidia, bolstering its push into the data center market.

Nvidia invested $3.5 billion in convertible bonds issued by MediaTek as part of the deal, the companies said on Monday, adding fuel to a near 200% rally in the Taiwanese firm's shares this year.

MediaTek is the world's biggest smartphone chip company by market share, according to Counterpoint Research, and the main rival to U.S. giant Qualcomm. But MediaTek has recently looked to diversify by designing custom chips for data centres.

Hyperscalers and other tech companies are increasingly building custom chips to run AI workloads. MediaTek is emerging as a player that can build these, posing a potential challenge to Broadcom, a market leader.

MediaTek shares year-to-date.

The partnership will see MediaTek offer Nvidia's NVLink Fusion platform for customers developing custom AI chips. That means the custom semiconductors that MediaTek builds can be integrated with Nvidia's AI infrastructure and systems.

NVLink Fusion is part of Nvidia's strategy to stay central to AI infrastructure even as companies move toward using their own chips to run certain AI processes.

The two companies will also work together on "local AI computing," which means chips designed for PCs as well as systems for cars.

In June, MediaTek said its custom AI chip business would bring in $2 billion of revenue this year with a total addressable market of up to $80 billion by 2027.

CNBC has reached out to MediaTek to ask if the Nvidia deal has changed that guidance.

In a press release issued on Monday, Nvidia CEO Jensen Huang called MediaTek "one of the world's great semiconductor companies."