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Artificial intelligence (AI) is still driving the stock market in 2024, and specialized semiconductors remain a key piece of the computing architecture necessary to drive this new wave in tech. Amid soaring demand for AI chips, the exponential growth in names like Nvidia (NVDA) has been a dominant storyline - but as NVDA stock trades above $900 per share, it's worth taking a look at other investment opportunities among AI chip stocks.
That brings us to ARM Holdings (ARM), which just emerged from its post-IPO lockup period, and longtime Nvidia rival Advanced Micro Devices (AMD), which offers solutions for everything from AI to gaming. As investors attempt to find “the next Nvidia,” here's a closer look at the growth forecasts for ARM and AMD, their current valuations, and what Wall Street analysts are expecting for both stocks.
The Case for Arm Holdings Stock
ARM Holdings (ARM) is a leading semiconductor and software design company, specializing in the development and licensing of intellectual property (IP) for central processing unit (CPU) products and related technologies.
ARM stock has performed exceptionally in 2024, with a YTD gain of 72%.
ARM shot higher after its well-received earnings release on Feb. 8, with revenue reaching $824 million for the third quarter of fiscal year 2024, up 14% from the year-ago period. The top-line figure beat analysts' expectations, as did adjusted EPS of $0.29.
Looking ahead to the fourth quarter of 2024, ARM guided for EPS of $0.28 to $0.32, with revenue projected between $850 million and $900 million. That forecast topped Wall Street's consensus estimates for Q4 revenue of $780.3 million and adjusted EPS of $0.21, and ARM also raised its fiscal year 2024 forecast.
Following the earnings-related pop, ARM shares caught another boost of buying pressure after Nvidia disclosed, via a regulatory filing, an ARM investment worth $147.3 million.
The company's market cap has now surged to $133 billion, and ARM is currently priced at 41.87 times forward sales - making the stock roughly twice as expensive as Nvidia, by this measure. Likewise, ARM's price/earnings-to-growth (PEG) ratio of 2.06 is nearly double NVDA's PEG ratio of 1.07, indicating the shares are priced at a premium relative to their expected growth.
Analyst ratings for ARM Holdings are generally positive, with a consensus opinion of “moderate buy.” Out of 23 analysts covering the stock, 13 suggest a “strong buy,” 9 recommend a “hold,” and 1 has issued a “strong sell.” However, ARM has already outstripped its mean price target of $92.53 by a considerable margin.
The Case for Advanced Micro Devices Stock
Advanced Micro Devices (AMD) is a powerhouse in the semiconductor industry, known for its high-performance computing and graphics solutions. With a strategic emphasis on AI and machine learning, AMD is pushing the boundaries of innovation to challenge competitors and solidify its position in the market.
In 2024, AMD stock has gained 37.5% - not quite as eye-popping as some other AI-related stocks, but still easily outperforming the broader equities market.
AMD reported Q4 results for fiscal year 2023 on Jan. 30, with revenue of $6.17 billion exceeding expectations. Adjusted EPS of $0.77 arrived right in line with Wall Street's consensus. Looking ahead to the first quarter of 2024, AMD expects revenue to be approximately $5.4 billion, plus or minus $300 million. AMD projects over $2 billion in sales from AI chips in 2024, positioning the company well in the rapidly growing generative AI compute market.
Back in December, AMD finally unveiled the long-awaited Instinct MI300 Series accelerator family, designed to handle massive workloads in AI applications. The MI300 is expected to outperform rivals in AI inference workloads after model training, with industry-leading capacity and bandwidth according to AMD CEO Lisa Su, potentially challenging Nvidia's dominance in the AI chip market.
While some of AMD's valuation multiples also appear stretched, the stock is more reasonably priced than ARM at current levels, based on its forward price/sales ratio of 12.68 and PEG ratio of 1.15.
Analyst sentiment toward AMD is overwhelmingly positive, with a “strong buy” consensus. Out of 33 analysts, 27 recommend a “strong buy,” 1 suggests a “moderate buy,” and 5 suggest a “hold.” Like ARM, however, AMD is currently trading above Wall Street's mean price target of $187.17.
Which AI Chip Stock is a Better Buy Right Now?
In the battle of AI chip stocks, both ARM Holdings and AMD present compelling opportunities - but AMD emerges as the more attractive stock to buy right now. While ARM's innovative chip architecture positions it well for the AI era, its sky-high valuation raises concerns about how sustainable the rally is going forward.
AMD, on the other hand, is more reasonably valued relative to its growth prospects, and also boasts a strong foothold in the AI chip market of its own. At current levels, AMD seems better-positioned to outperform in the near term, making it the better choice for investors seeking exposure to the AI chip market.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
