Shares of Nvidia(NASDAQ: NVDA) and Arm Holdings(NASDAQ: ARM) have been in fine form on the stock market in 2024 with impressive gains of 75% and 66%, respectively, so far, and artificial intelligence (AI) has played a key role in this solid surge.
While Nvidia's fiscal 2024 fourth-quarter results, which were released in February, established the company's dominance in the fast-growing market for AI chips, Arm also joined the AI bandwagon following its latest quarterly results. However, if you are looking to buy an AI stock right now and need to choose between Nvidia and Arm Holdings, which one should you buy?
Let's find out.
The case for Nvidia
Nvidia's eye-popping stock market surge can be justified by the company's terrific share of the AI chip market, which has led to a sharp acceleration in the company's revenue and earnings growth in recent quarters. The graphics specialist ended fiscal 2024 with $60.9 billion in revenue, an increase of 126% over the prior year.
Additionally, Nvidia's non-GAAP (adjusted) earnings shot up 288% in fiscal 2024 to $12.96 per share, driven by a jump of 14.6 percentage points in the company's gross margin. That's not surprising as the chipmaker has been enjoying immense pricing power in the AI chip market. Its flagship H100 AI processor reportedly carries a hefty margin of 1,000%, according to financial services and investment banking provider Raymond James.
What's more, customers have been willing to pay the high prices of Nvidia's AI processors as they don't want to be left behind in the race to develop AI applications. Meta Platforms, for instance, is going to spend more money on procuring Nvidia's H100 processor in 2024. It is also worth noting that major cloud computing providers have already set their sights on deploying Nvidia's next-generation AI GPUs based on the Blackwell architecture.
All this indicates why Nvidia is anticipating that the demand for its upcoming AI processors will continue to be higher than supply, even though the company has been taking steps to boost its production capacity. The healthy demand for Nvidia's AI chips explains why analysts have significantly upgraded their revenue growth expectations from the company for the current fiscal year and beyond.
NVDA Revenue Estimates for Current Fiscal Year data by YCharts
Even better, analysts estimate that Nvidia's robust share of the AI chip market is likely to translate into healthy long-term growth, with its data center revenue alone jumping to $280 billion by 2027. As such, Nvidia could continue to be a top growth stock thanks to the fact that it currently controls more than 90% of the lucrative AI chip market, which is expected to generate more than $300 billion in annual revenue by the end of the decade.
The case for Arm Holdings
Like Nvidia, Arm Holdings is also a play on the AI chip market. However, unlike Nvidia, the company isn't involved in manufacturing chips. Instead, Arm licenses its intellectual property (IP), software tools, and architecture to chipmakers so that they can develop and manufacture different types of processors such as central processing units (CPUs), neural processing units (NPUs), and graphics processing units (GPUs).
The demand for all these types of chips is increasing thanks to the growing adoption of AI servers, personal computers (PCs), and smartphones. Not surprisingly, the number of companies looking to develop AI chips with the help of Arm's IP has also increased. Arm reported that 27 companies are using its total access license at the end of the third quarter of fiscal 2024, up from 18 at the end of fiscal 2023.
The company credits the new licensing agreements to the growing demand for "high-performance CPUs etc. to embedded AI into every end device." The new licenses explain why Arm's revenue pipeline saw a significant improvement. Its remaining performance obligations (RPO), which refers to the total value of a company's unfulfilled contracts, shot up to $2.4 billion in fiscal Q3, up 38% from the year-ago period.
There is a solid chance that Arm will be able to sustain this newly found momentum in the long run as well. That's because the company's architecture powers more than 50% of the chips that have a processor inside them. Also, the adoption of the company's AI-specific Armv9 architecture, which commands double the royalty compared to the previous generation's architecture, is increasing at a nice pace.
In all, it is easy to see why analysts raised their revenue growth projections from Arm as well.
ARM Revenue Estimates for Current Fiscal Year data by YCharts
Also, analysts forecast the company's earnings to increase at an annual rate of just over 44% over the next five years, which is higher than the 38% annual earnings growth expected from Nvidia.
The verdict
Both Arm Holdings and Nvidia benefit from the proliferation of AI chips. However, investors looking to choose one of these two AI stocks now would be better off investing in Nvidia.
That's because Nvidia stock is significantly cheaper than Arm Holdings right now from a valuation perspective. Nvidia's sales multiple of 36 is lower than Arm's reading of 44. A similar story unfolds if we look at their trailing and forward earnings multiples.
NVDA PE Ratio data by YCharts
Moreover, Nvidia is growing at a much faster pace than Arm, as the latter's revenue is expected to increase 19% this year. Arm, therefore, is expensive if you consider the potential growth that it is expected to deliver, making Nvidia the better AI stock to buy right now as it is not only delivering stronger growth but also has a much cheaper valuation.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms and Nvidia. The Motley Fool has a disclosure policy.
