Arm Holdings (NASDAQ: ARM) and Advanced Micro Devices (NASDAQ: AMD) have experienced distinct trajectories on the market in 2024; one soaring to new heights while the other struggles to keep pace with the semiconductor industry’s growth.
While Arm’s stock surged by an astounding 50% this year, AMD witnessed a decline of 10%, diverging from the 10% increase seen in the PHLX Semiconductor Sector index. The current market environment, fueled by the rising demand for artificial intelligence (AI) chips, has deeply influenced both companies in contrasting ways.
Let’s delve deeper into the AI opportunities presented by Arm and AMD to discern which stock holds greater promise for investors at present.
The Ascendancy of Arm Holdings
Arm Holdings distinguishes itself by not manufacturing any chips; instead, the British company licenses its chip architecture and intellectual property (IP) to chipmakers and original equipment manufacturers (OEMs). These companies leverage Arm’s designs to produce various chips, including central processing units (CPUs), graphics processing units (GPUs), and smartphone processors.
This strategic positioning places Arm at the forefront of harnessing the steady growth of the semiconductor market, which has seen a significant boost from the AI sector. Surpassing expectations, Arm reported record quarterly revenue of $939 million in the first quarter of fiscal 2025 (ending on June 30), marking a remarkable 39% surge from the previous year.
Driven by a robust 72% year-over-year increase in licensing revenue to $472 million, Arm attributed this growth to “multiple high-value license agreements” and the soaring demand for its technology in AI-centric applications. Moreover, the company’s adjusted earnings rose by 67% year over year to $0.40 per share in the last quarter.
The array of customers embracing Arm’s AI-focused Armv9 architecture, particularly in the smartphone domain, has contributed to a notable uptick in licensing revenue sourced from this segment – reaching a quarter of total royalty revenue. Forecasts suggest that a staggering 100 billion Arm-based AI chips could be shipped by the conclusion of fiscal 2026.
An increase of 29% year over year in remaining performance obligations (RPOs) to $2.17 billion further affirms Arm’s solid revenue trajectory, reflecting a healthy revenue pipeline poised for sustainable growth. Analysts project an accelerated earnings growth for Arm, with a robust annual growth rate of 31% anticipated over the next five years.
The Resilience of Advanced Micro Devices
Although AMD’s stock performance has lagged this year, investors found solace in the company’s recent results that showcased notable growth in sales of its data center chips. Despite a modest 9% year-over-year increase in overall Q2 revenue to $5.84 billion, AMD’s data center revenue skyrocketed by 115% to $2.8 billion.
AMD’s success has been bolstered by the thriving demand for its data center CPUs and GPUs, integral components in servers powering AI workloads. During the latest earnings conference call, CEO Lisa Su revealed, “We delivered our third consecutive 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.”
Emphasizing the growing enterprise and cloud AI customer base, Su highlighted AMD’s efforts to ramp up production of MI300 AI accelerators to match the escalating market demand. The company raised its 2024 target for data center GPU sales to at least $4.5 billion, surpassing the initial forecast by $500 million and doubling the $2 billion projection issued last October.
AMD’s growth extends beyond data centers, with a 49% year-over-year surge in client segment revenue to $1.5 billion, propelled by a resurgence in the personal computer (PC) market, where AI-enabled offerings are gaining traction. Introducing CPUs integrated with dedicated AI processors has proved to be a savvy move, given the anticipated 44% annual growth rate in AI PC sales through 2028, as per Canalys.
The company’s AI-infused Ryzen processors are on track to power over 100 PC designs in the coming quarters, signaling continued growth potential in the client segment. Analysts predict a substantial revenue growth leap from 13% to $25.7 billion in 2024 to 28% in 2025 for AMD, with estimated earnings expanding at a compound annual growth rate of 33% over the next five years.
While both companies are expected to expand at a similar rate, their valuations differ significantly. Arm, outpacing AMD in growth, carries a relatively premium price tag with a price-to-sales ratio of 32, compared to AMD’s 9. Additionally, AMD boasts a lower forward earnings multiple of 38, contrasting with Arm’s 70.
The Final Analysis
Arm and AMD are both set to capitalize on the AI revolution reshaping the semiconductor landscape, albeit facing distinct valuation metrics. Arm presents rapid growth prospects but comes at a higher cost, while AMD, with its resilient financials, offers a more attractively priced alternative for investors seeking exposure to the AI market.