Both companies are benefiting from the AI ​​semiconductor boom, but one looks like the better investment right now.
shares of Nvidia (NVDA -2.68%) and arm holdings (arm -3.66%) The stock market has risen an impressive 75% and 66%, respectively, in 2024 so far, with artificial intelligence (AI) playing a key role in this robust rally.
Nvidia's fiscal 2024 fourth-quarter results released in February established the company's dominance in the fast-growing AI chip market, but Arm has also joined the AI ​​bandwagon following its latest quarterly results. But if you're looking to buy AI stocks right now and have to choose between Nvidia and Arm Holdings, which should you buy?
Let's check it out.
For Nvidia
Nvidia's spectacular stock market surge may be justified by the company's impressive share of the AI ​​chip market, which has led to a sharp acceleration in the company's revenue and profit growth in recent quarters. is connected to. The graphics specialty company ended fiscal year 2024 with revenue of his $60.9 billion, an increase of 126% from the previous year.
Additionally, NVIDIA's non-GAAP (adjusted) earnings increased 288% to $12.96 per share in fiscal 2024, driven by a 14.6 percentage point increase in the company's gross margin. This is not surprising, as chipmakers enjoy tremendous pricing power in the AI ​​chip market.The flagship H100 AI processor reportedly has a significant profit margin of 1,000%, according to the financial services and investment banking provider. raymond james.
Additionally, customers are willing to pay higher prices for Nvidia's AI processors because they don't want to be left behind in the race to develop AI applications. meta platformFor example, in 2024, it plans to spend more money procuring Nvidia's H100 processors. It is also worth noting that major cloud computing providers are already eyeing the introduction of his Nvidia's next-generation AI GPUs based on the Blackwell architecture.
All of this points to why NVIDIA expects demand for future AI processors to continue to outstrip supply, even as it takes steps to increase production capacity. Robust demand for Nvidia's AI chips explains why analysts have significantly revised upward their forecasts for the company's revenue growth for this year and beyond.
Even better, analysts predict that Nvidia's strong share of the AI ​​chip market will likely lead to healthy long-term growth, with the company's data center revenues alone expected to jump to $280 billion by 2027. Masu. As such, Nvidia may remain a top growth stock. Thanks to that, the company now controls more than 90% of the lucrative AI chip market, with annual revenue expected to exceed $300 billion by the end of 2020.
In the case of Arm Holdings
Like Nvidia, Arm Holdings is also entering the AI ​​chip market. However, unlike Nvidia, the company is not involved in chip manufacturing. In exchange, Arm licenses its intellectual property (IP), software tools, and architecture to chipmakers, who then use the Enables the development and manufacturing of different types of processors (GPUs).
The proliferation of AI servers, personal computers (PCs), and smartphones is increasing the demand for all these types of chips. Not surprisingly, a growing number of companies are also looking to leverage Arm's IP to develop AI chips. Arm reports that as of the end of the third quarter of fiscal 2024, his 27 companies were using the company's total access licenses, up from his 18 companies at the end of fiscal 2023.
The company said the new license agreement is due to growing demand for “high-performance CPUs and more to embed AI into any end device.” The new license explains why Arm's revenue pipeline has improved so much. Remaining performance obligations (RPO), a measure of a company's total outstanding contracts, surged 38% year over year to $2.4 billion in the fiscal third quarter.
There's a good chance Arm can maintain this newfound momentum long term. That's because more than 50% of chips with built-in processors use the company's architecture. Also, the adoption of the company's AI-specific Armv9 architecture is increasing at a good pace, requiring twice the royalties compared to the previous generation architecture.
Overall, it's also easy to see why analysts have raised their sales growth forecasts for Arm.
Analysts also expect the company's profits to grow at a more than 44% annual rate over the next five years, which is faster than Nvidia's 38% annual profit growth forecast.
verdict
Arm Holdings and Nvidia are both benefiting from the proliferation of AI chips. But investors looking to choose one of these two AI stocks right now would be better off investing in Nvidia.
That's because, from a valuation perspective, Nvidia stock is currently significantly cheaper than Arm Holdings. Nvidia's sales multiple of 36 is lower than Arm's sales multiple of 44. A similar story unfolds when we look at the company's past and future earnings multiples.
Additionally, NVIDIA is growing at a much faster pace than Arm, with Arm's revenue expected to increase by 19% this year. Therefore, considering the potential growth that Arm is expected to deliver, Arm is overvalued and Nvidia is a good AI stock to buy now, with strong growth as well as a much cheaper valuation. It becomes.
Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool's board of directors. Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has a position in and recommends MetaPlatform and Nvidia. The Motley Fool has a disclosure policy.