Arm Holdings (NASDAQ: ARM) and AMD (NASDAQ: AMD) represent unique avenues for investors looking to capitalize on the surging demand for artificial intelligence (AI) chips.
Arm, renowned for its CPU designs, distinguishes itself by focusing on licensing rather than chip manufacturing. In contrast, AMD offers a diverse range of products, from CPUs to GPUs and custom accelerated processing units.
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Both companies have witnessed substantial stock price gains recently, reflecting optimism in the market. However, a closer look reveals compelling dynamics that play a crucial role in determining the preferred investment choice between the two contenders.
Arm Holdings: Charting an AI-Focused Trajectory
Arm’s chip designs stand out for their efficiency and compactness compared to competitors like Intel and AMD. Its prevalence in smartphones underscores its dominance, yet challenges have emerged with the evolution of the AI chip landscape.
In the fiscal year 2024, Arm experienced 13% revenue growth, driven by the emergence of AI-enabled chip designs and market share advancements in cloud servers and connected vehicles.
Despite impressive growth projections for fiscal 2025, Arm’s rich valuation (82 times forward earnings) raises concerns about its ability to sustain momentum amidst escalating competition.
AMD: Navigating AI Waters
AMD, although a challenger in the CPU and GPU markets, has maintained competitiveness by offering cost-effective solutions in the face of industry giants like Intel and Nvidia.
The company anticipates revenue and EPS growth in 2024, primarily fueled by the stabilization of the PC market and the introduction of cost-effective Instinct GPUs tailored for AI applications.
Despite promising prospects, AMD faces the challenge of justifying its valuation (57 times forward earnings) amidst intensifying competition from industry leaders and a changing market landscape.
The Preferred Pick: AMD
While both Arm and AMD stand to benefit from the expanding AI market, their current valuations pose risks to investors. Notably, both stocks trade at higher multiples than Nvidia, a key player known for its rapid growth.
Given the circumstances, a cautious stance is advisable for potential investors. However, if a choice must be made between the two, AMD emerges as the more favorable option due to its stable growth trajectory, diversified business model, and comparatively lower valuation.
Investors should keep a close eye on SoftBank’s significant ownership in Arm Holdings, as potential actions by the former parent company could influence the stock’s future performance.