Rising demand for AI-specific semiconductors is a boon for both companies.
Arm Holdings Inc. (ARM -1.21%) and Advanced Micro Devices Inc. (AMD -1.50%) are experiencing contrasting stock market fortunes in 2024, with one company posting healthy profits so far this year while the other is underperforming the overall semiconductor market.
Arm shares have risen 50% this year, while AMD has lost 10% of its value compared with a 10% gain for the PHLX Semiconductor Sector Index. It's worth noting that both companies are benefiting from rising demand for artificial intelligence (AI) chips in different ways.
Here we take a closer look at Arm and AMD's AI prospects to see which company is worth investing in right now.
The case of Arm Holdings
Arm Holdings does not manufacture 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 produce a variety of chips, including central processing units (CPUs), graphics processing units (GPUs) and smartphone processors.
This puts the UK company in a strong position to capitalize on the long-term growth of the semiconductor market, which has been fueled in large part by AI. So it's no surprise that Arm delivered record quarterly revenue of $939 million in the first quarter of fiscal 2025 (ended June 30), up an astounding 39% from the same period last year.
Arm's licensing revenue soared 72% year over year to $472 million. The company attributed the impressive increase to “multiple high-value licensing agreements” and increased demand for Arm's technology in AI-related applications. Additionally, Arm's adjusted earnings soared 67% quarter over quarter to $0.40 per share.
The company reported that it had 33 Arm Total Access (ATA) licenses at the end of the first quarter, up from 20 licenses in the same period last year. ATA provides Arm customers with an end-to-end platform that enables them to develop complex chip systems and accelerate time to market, which is why more customers are adopting Arm's AI-focused Armv9 architecture, especially in the smartphone space.
Arm now derives a quarter of its royalty revenue from the Armv9 architecture, up from 20% last quarter, and the company estimates that as many as 100 billion Arm-based AI chips could ship by the end of fiscal year 2026. Arm's healthy licensee growth also explains why its remaining performance obligations (RPOs) rose 29% year-over-year to $2.17 billion last quarter.
This metric represents revenue that Arm will recognize in upcoming quarters, suggesting that the company is building a healthy revenue pipeline for the long term. It's no surprise that analysts are expecting Arm's revenue growth to accelerate.
ARM's current quarter EPS forecast data from YCharts
The company is expected to post a robust earnings growth rate of 31% annually over the next five years, and this growth seems achievable thanks to AI-driven growth in the semiconductor market.
For AMD
AMD's stock price may have underperformed the market this year, but investors have welcomed the company's recent performance as its data center chip sales have grown at a strong pace. While AMD's overall revenue rose just 9% year over year to $5.84 billion in the second quarter, data center revenue grew an astounding 115% year over year to $2.8 billion.
AMD benefited from rising demand for datacenter CPUs and GPUs being deployed in servers running AI workloads. During the company's latest earnings call, CEO Lisa Su said: “Datacenter GPU revenue hit a record high for the third consecutive quarter, and quarterly MI300 revenue exceeded $1 billion for the first time. Microsoft is expanding its 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 during the quarter,” and the company is working to expand production of its MI300 AI accelerators to meet strong end-market demand. AMD now expects to sell at least $4.5 billion worth of data center GPUs in 2024, up $500 million from its previous forecast. That's more than double the company's original forecast of $2 billion released last October.
But that's not AMD's only AI-related growth area: The company's client division revenue rose 49% year over year to $1.5 billion, driven by a recovering personal computer (PC) market that's seeing a surge in sales of AI-enabled products. The company sells CPUs with dedicated AI processors built in, which seems like a smart move, since AI PC sales are expected to grow at a 44% annual rate through 2028, according to Canalys.
AMD notes that its AI-powered Ryzen processors are expected to be featured in more than 100 PC designs over the next few quarters, which could help the company's customer segment continue to grow at a healthy pace. Not surprisingly, AMD's revenue growth is expected to more than double from a projected 13% increase this year to $25.7 billion to 28% in 2025. Meanwhile, the company's revenue is expected to grow at a compound annual rate of 33% over the next five years.
So AI is likely to be a big driver of growth for AMD, but will it be a better option than Arm? To find out, let's take a closer look at the valuations of both companies.
Verdict
Arm is growing at a faster pace than AMD, but it's also significantly more expensive: Arm's price-to-sales multiple is 32, while AMD's sales multiple is 9. Also, AMD's forward earnings multiple of 38 is much lower than Arm's multiple of 70.
Both companies are projected to post comparable revenue growth over the next five years. Of course, Arm is growing faster right now, but AMD's growth could accelerate significantly as it serves several robust AI-related markets in the form of data center accelerators and PCs.
Therefore, investors looking to add an AI stock trading at a fair valuation to their portfolio could be well-placed to buy AMD now.
