Best Artificial Intelligence (AI) Stock: Arm Holdings Vs. Advanced micro-devices

Arm holds (ARM -1.21%) and Advanced microdevices (AMD -1.50%) have seen contrasting stock market fortunes in 2024, with one of these companies posting healthy earnings so far this year, while the other has underperformed the broader semiconductor market.

The stockpile of weapons has increased by 50% this year. AMD, on the other hand, lost 10% of its value compared to 10% gains by PHLX Semiconductor Sector index. It’s worth noting that both companies benefit from the growing demand for artificial intelligence (AI) chips in different ways.

Here’s a closer look at the AI ​​prospects of both Arm and AMD to help you figure out which of these two companies is getting their money’s worth right now.

The case for Arm Holdings

Arm Holdings does not manufacture any chips. In return, the company licenses its architecture and intellectual property (IP) to chipmakers and original equipment manufacturers (OEMs) that use Arm designs to produce a wide range of chips such as central processing units (CPUs), graphics processing units (GPUs), and smartphone processors.

This puts the British company in a strong position to capitalize on the secular growth of the semiconductor market, which has received a nice boost thanks to AI. So it was no surprise to see Arm deliver record quarterly revenue of $939 million in the first quarter of fiscal 2025 (which ended June 30), an impressive 39% year-over-year increase .

Arm’s licensing revenue grew 72% year over year to $472 million. The company attributed this tremendous growth to “several high-value license agreements” and increased demand for Arm’s technology in AI-related applications. Additionally, Arm’s adjusted earnings rose 67% year-over-year to $0.40 per share last quarter.

The company reported that it ended the first fiscal quarter with 33 Arm Total Access (ATA) licenses, compared to 20 in the same period last year. ATA provides Arm customers with an end-to-end platform with which they can develop complex systems-on-chips and accelerate their time to market. This explains why Arm sees more customers adopting the AI-centric Armv9 architecture, especially in the smartphone space.

Arm now derives a quarter of its royalty revenue from the Armv9 architecture, up from 20% in the previous quarter. In addition, the company estimates that 100 billion Arm-based AI chips could be shipped by the end of fiscal 2026. Arm’s healthy licensee growth also explains why remaining performance obligations (RPOs) increased by 29% year over year in the previous quarter at $2.17 billion.

This metric represents the revenue that Arm will recognize in future quarters, indicating that the company is building a healthy long-term revenue pipeline. Not surprisingly, analysts expect Arm’s earnings growth to accelerate.

ARM EPS estimates for current fiscal year data by YCharts

The company is also expected to achieve a healthy annual earnings growth rate of 31% over the next five years, which it looks set to achieve thanks to AI-driven growth in the semiconductor market.

The case for AMD

AMD stock may have underperformed the market this year, but investors have cheered the company’s recent results as data center chip sales have grown at a commendable pace. Although AMD’s total second-quarter revenue rose just 9% year-over-year to $5.84 billion, its data center revenue rose 115% year-over-year to $2.8 billions of dollars.

AMD has benefited from increased demand for data center processors and GPUs, which are deployed on servers to power AI workloads. On the most recent earnings conference call, CEO Lisa Su noted, “We delivered the third consecutive quarter of record data center GPU revenue, with MI300 quarterly revenue exceeding $1 billion for the first time. Microsoft have expanded their use of MI300X accelerators to power GPT-4 Turbo and several Copilot services, including Microsoft 365 Chat, Word and Teams.”

Su added that AMD’s “enterprise and cloud AI customer pipeline” grew this quarter, and the company is working to produce more 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. This is more than double the company’s initial estimate of $2 billion issued last October.

However, this is not the only business segment where AMD is getting an AI-related boost. The company’s client segment revenue rose 49% year-over-year to $1.5 billion, thanks to a recovery in the personal computer (PC) market, where sales of AI-enabled offerings are taking off. The company has offered processors with dedicated AI processors built in, and that seems like a smart thing to do, as sales of AI computers are expected to grow at a 44% annual growth rate through 2028, according to Canalys.

AMD points out that its AI-powered Ryzen processors will power more than 100 PC models in the next few quarters, indicating that its customer segment could continue to grow 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 estimated 13% growth to $25.7 billion. Its earnings, on the other hand, are projected to grow at a compound annual growth rate of 33% over the next five years.

So AI is likely to drive a significant boost to AMD’s growth, but is it a better choice than Arm? To find out, let’s take a closer look at their ratings.

verdict

Arm is growing at a faster rate than AMD, but it’s 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 expected to see identical earnings growth over the next five years. Of course, Arm is the faster-growing one right now, but AMD’s growth is likely to pick up significantly as it serves some solid AI-related markets in the form of data center and PC accelerators.

So investors looking to add an AI stock to their portfolios that is trading at a reasonable valuation would do well to buy AMD right now.