Advanced Micro Devices (AMD 0.29%) stock has had a terrible run on the market in the past year, losing almost 21% of its value while the broader PHLX Semiconductor Sector index has clocked healthy gains of 24% during this period.
In fact, AMD has been underperforming the broader semiconductor industry over the past five years. This is evident from the 141% gains clocked by AMD during this period as compared to the 170% jump in the PHLX Semiconductor Sector index in the last five years. AMD’s below-par performance can be attributed to multiple factors.
The weakness in the personal computer market following the novel coronavirus pandemic, the soft demand for gaming consoles, as well as the chipmaker’s failure to jump onto the artificial intelligence (AI) bandwagon while rival Nvidia ran away with this market, have all contributed toward AMD’s underperformance.
While there is a good chance that AMD may be able to regain its mojo in the future thanks to multiple catalysts, this semiconductor stock could still end up underperforming two other companies that are benefiting from the rapid proliferation of AI. Let’s take a closer look at those two names and see why they could end up overtaking AMD’s market cap over the next five years.
1. Palantir Technologies
Palantir Technologies (PLTR -5.17%) stock has surged a stunning 301% in the past year, leading to outstanding growth in its market cap. As the following chart shows us, Palantir’s market cap has jumped significantly, and it is now very close to AMD’s level.
PLTR Market Cap data by YCharts
Looking ahead, it won’t be surprising to see Palantir’s market cap exceeding that of AMD within the next five years. A big reason why that may happen is that customers are lining up to deploy Palantir’s Artificial Intelligence Platform (AIP) so that they can integrate generative AI into their business processes to drive greater efficiency and productivity.
As a result, Palantir is now growing at a faster clip. Its revenue growth has improved in recent quarters on account of an increase in the customer count while the increased adoption of AIP by existing customers is positively impacting its margin profile.
PLTR Revenue (Quarterly) data by YCharts
Analysts are expecting Palantir to deliver $2.8 billion in annual revenue for 2024, which would be a 26% jump from the prior year. The company’s top line is expected to grow at 20%-plus rates for 2025 and 2026 as well.
PLTR Revenue Estimates for Current Fiscal Year data by YCharts
However, don’t be surprised to see Palantir recording stronger growth than analysts are expecting on account of the rapid adoption of AI software platforms by both government and commercial customers. Palantir’s overall customer base increased by 39% year over year in the third quarter of 2024 to 629. More importantly, its net dollar retention rate came in at 118% for the quarter, which was a solid improvement over the year-ago period’s reading of 107%.
The net dollar retention rate compares the trailing twelve-month revenue generated by Palantir’s customers at the end of a quarter to the trailing twelve-month revenue recognized from those same customers in the year-ago period. So, a reading of more than 100% means that its existing customers are adopting more of its offerings.
Also, the expansion in the net dollar retention rate is an indication that AIP is indeed driving stronger customer spending as management pointed out on the previous earnings conference call. The good news for Palantir investors is that the AI software market is just taking off and it could soar remarkably in the long run.
ABI Research estimates that the AI software market was worth $98 billion last year, and that figure could grow at an annual rate of 30% through 2030 to $391 billion. It is worth noting that Palantir has started matching this market’s growth already as its revenue in the third quarter of 2024 increased 30% year over year to $726 million. The company’s earnings grew at a faster pace of 43% from the year-ago quarter.
As Palantir’s AI software business gains more momentum thanks to its quickly expanding customer base, there is a solid chance that it will be able to grow at a faster pace than the overall AI software market and gain more share in this space. This is precisely the reason why Palantir stock could continue soaring over the next five years and may even be worth more than AMD as it is one of the leading players in the AI software platforms market.
2. Arm Holdings
Arm Holdings (ARM -3.47%) is another stock that has witnessed a stellar jump in the past year with gains of 100% as of this writing. Not surprisingly, the gap between Arm and AMD’s market cap has closed down significantly in the past year.
AMD Market Cap data by YCharts
Known for licensing its chip architecture and intellectual property (IP) to major chipmakers such as Nvidia, Samsung, Qualcomm, and consumer electronics giant Apple, Arm Holdings has a solid business model that should set it up for years of outstanding growth. Apart from receiving a licensing fee from customers who purchase its licenses to design chips, the British technology company also gets a royalty from each chip that’s manufactured using its IP.
Investors should note that Arm is the dominant player in the smartphone market as its architecture powers 99% of smartphone application processors. It is also a key player in the Internet of Things market as well with 54% of IoT devices containing processors designed using its IP. And now, Arm Holdings is gaining ground in the cloud computing and networking equipment markets as well.
Its share of cloud computing chips has increased to 15% in fiscal 2024 from 9% in fiscal 2022. Meanwhile, its networking equipment market share has jumped to 28% from 23% over the same period. This improvement isn’t surprising as major chip designers such as Nvidia are using Arm’s architecture to design server processors that are powering AI systems in data centers.
Moreover, Arm’s margin profile has also received a big boost thanks to the higher royalty that its latest generation Armv9 architecture commands because of its AI capabilities. This explains why Arm’s earnings are expected to grow 31% in the next fiscal year to $2.04 per share following a 23% increase in the current one to $1.56 per share. Even better, Arm is expected to sustain its outstanding momentum after a couple of fiscal years as well.
ARM EPS Estimates for Current Fiscal Year data by YCharts
It won’t be surprising to see Arm sustaining its momentum for a longer period and record healthy growth over the next five years. That’s because the overall semiconductor market is expected to exceed $1 trillion in annual revenue in 2030 as compared to $627 billion last year. As the overall value of chips sold increases over the next five years, Arm should witness robust growth in its revenue and earnings thanks to its solid customer base and improving influence in the global chip market.
And that’s precisely why Arm could be worth more than AMD after five years considering that the latter has to contend with stiff competition from the likes of Nvidia and may have to wait for a long time for segments such as gaming to step on the gas once again.
