Arm Holdings (ARM 0.57%) and Advanced Micro Devices (AMD -4.31%) have witnessed contrasting fortunes on the stock market in 2024, with one of these companies sitting on healthy gains so far this year while the other one underperforms the broader semiconductor market.
Arm stock has jumped 50% this year. AMD, on the other hand, has lost 10% of its value compared to the 10% gains clocked by the PHLX Semiconductor Sector index. It is worth noting that both companies are benefiting from the growing demand for artificial intelligence (AI) chips in different ways.
Here's a closer look at the AI-related prospects of both Arm and AMD to help you find out which of these two companies are worth your money right now.
The case for Arm Holdings
Arm Holdings doesn't manufacture any chips. Instead, the company licenses its chip architecture and intellectual property (IP) to chipmakers and original equipment manufacturers (OEMs) who use Arm's designs to manufacture a broad range of chips such as central processing units (CPUs), graphics processing units (GPUs), and smartphone processors.
This puts the British company in a solid position to capitalize on the secular growth of the semiconductor market, which has received a nice boost thanks to AI. So, it wasn't surprising to see Arm deliver record quarterly revenue of $939 million in the first quarter of fiscal 2025 (which ended on June 30), an impressive jump of 39% from the same period last year.
Arm's licensing revenue shot up a solid 72% year over year to $472 million. The company credited this terrific increase to "multiple high-value license agreements" and the increased demand for Arm's technology in AI-related applications. What's more, Arm's adjusted earnings shot up 67% year over year to $0.40 per share last quarter.
The company reported that it ended fiscal Q1 with 33 Arm Total Access (ATA) licenses compared to 20 in the same period last year. ATA gives Arm customers an end-to-end platform with which they can develop complex chip systems and accelerate their time to market. That explains why Arm is witnessing more customers adopting its AI-focused Armv9 architecture, especially in the smartphone space.
Arm now gets a quarter of its royalty revenue from the Armv9 architecture, up from 20% in the previous quarter. What's more, the company estimates that a whopping 100 billion Arm-based AI chips could be shipped by the end of fiscal 2026. The healthy growth in Arm's licensees also explains why its remaining performance obligations (RPOs) increased 29% year over year in the previous quarter to $2.17 billion.
This metric represents revenue that Arm will recognize in future quarters, indicating that the company is building a healthy revenue pipeline for the long run. Not surprisingly, analysts are expecting Arm's earnings growth to accelerate.
ARM EPS Estimates for Current Fiscal Year data by YCharts
The company is also expected to clock a nice annual earnings growth rate of 31% for the next five years, which it seems capable of achieving thanks to the AI-driven growth in the semiconductor market.
The case for AMD
AMD stock may have underperformed the market this year, but investors cheered the company's recent results as sales of its data center chips grew at a commendable pace. Though AMD's overall Q2 revenue was up only 9% year over year to $5.84 billion, its data center revenue increased a whopping 115% year over year to $2.8 billion.
AMD benefited from the improving demand for its data center CPUs and GPUs, which are being deployed in servers for powering AI workloads. On the latest earnings conference call, CEO Lisa Su remarked: "We delivered our third straight quarter of record data center GPU revenue with MI300 quarterly revenue exceeding $1 billion for the first time. Microsoft expanded their use of MI300X accelerators to power GPT-4 Turbo and multiple Copilot services, including Microsoft 365 Chat, Word, and Teams."
Su added that AMD's "enterprise and cloud AI customer pipeline grew in the quarter" and the company is working to produce more of its MI300 AI accelerators to meet the solid end-market demand. AMD is now expecting to sell at least $4.5 billion worth of data center GPUs in 2024, up by $500 million from the previous forecast. That's more than double the company's original forecast of $2 billion issued in October last year.
However, this is not the only business segment where AMD is getting an AI-related boost. The company's client segment revenue jumped 49% year over year to $1.5 billion thanks to a recovery in the personal computer (PC) market, where the sales of AI-capable offerings are taking off. The company has been offering CPUs with dedicated AI processors built into them, and that seems like a smart thing to do as sales of AI PCs are expected to increase at an annual growth rate of 44% through 2028, according to Canalys.
AMD points out that its AI-powered Ryzen processors are going to power more than 100 PC designs over the next few quarters, indicating that its client segment could keep growing at a healthy pace. Not surprisingly, AMD's revenue growth rate is expected to more than double to 28% in 2025 from this year's projected jump of 13% to $25.7 billion. Its earnings, on the other hand, are estimated to clock a compound annual growth rate of 33% for the next five years.
So, AI is likely to drive a significant improvement in AMD's growth, but is it a better pick than Arm? To find out, let's take a closer look at their valuations.
The verdict
Arm is growing at a faster pace than AMD, but it is also quite expensive. Arm has a price-to-sales ratio of 32 compared to AMD's sales multiple of 9. Again, AMD's forward earnings multiple of 38 is much lower than Arm's multiple of 70.
Both companies are forecast to clock identical earnings growth over the next five years. Of course, Arm is the one with faster growth right now, but AMD's growth is likely to pick up significantly as it serves a couple of solid AI-related markets in the form of data center accelerators and PCs.
So, investors looking to add an AI stock to their portfolios that's trading at a reasonable valuation would do well to buy AMD right now.
