ARM vs. AMD: Which AI chip stock is a better buy out?

Artificial intelligence continues to drive the stock market in 2024, and specialized semiconductors remain a key component in the computing architecture necessary to fuel this new technological wave. Amid the growing demand for AI chips, the exponential growth of companies like Nvidia has been a dominant story, but with its shares trading above $900, it is worth exploring other investment opportunities.

This brings us to ARM Holdings, which has just exited its post-IPO lock-up period, and Advanced Micro Devices, Nvidia's rival that offers solutions for everything from AI to gaming. As investors try to find "the next Nvidia," let's take a closer look at the growth forecasts, current valuations, and analyst expectations for both stocks.

The case of ARM Holdings

ARM is a leading company in semiconductor design and software, specializing in the development and licensing of intellectual property for CPU products and related technologies.

ARM's stock has performed exceptionally in 2024, with a gain of 72% year-to-date.

ARM surged after posting impressive results on February 8, with revenues of $824 million for the third quarter of fiscal year 2024, a 14% increase over the previous year. Both this figure and the adjusted EPS of $0.29 exceeded analysts' expectations.

For the fourth quarter, ARM projected an EPS between $0.28 and $0.32, with revenues between $850 and $900 million, surpassing Wall Street estimates. The company also raised its forecast for fiscal year 2024.

Following the momentum related to the results, ARM shares received another boost when Nvidia revealed an investment in ARM worth $147.3 million.

The company's market capitalization has increased to $133 billion, and ARM is currently trading at 41.87 times future sales, roughly double that of Nvidia. Similarly, its PEG ratio of 2.06 is nearly double that of NVDA (1,07), indicating that the shares are priced at a premium relative to their expected growth.

Analyst ratings for ARM are generally positive, with a consensus opinion of "moderate buy." Out of 23 analysts, 13 suggest "strong buy," 9 recommend "hold," and 1 has issued "strong sell." However, ARM has already exceeded its average target price of $92.53 by a considerable margin.

The case of Advanced Micro Devices

AMD is a powerhouse in the semiconductor industry, known for its high-performance computing and graphics solutions. With a strategic focus on AI and machine learning, AMD is challenging its competitors to solidify its position in the market.

In 2024, AMD's stocks have gained 37.5% - not as impressive as other AI-related stocks, but still easily outperforming the overall stock market.

AMD reported fourth quarter results for the fiscal year 2023 on January 30, with revenues of $6.17 billion that exceeded expectations. The adjusted EPS of $0.77 was in line with Wall Street consensus. For the first quarter of 2024, AMD expects revenues of approximately $5.4 billion, plus or minus $300 million. The company projects over $2 billion in AI chip sales in 2024.

In December, AMD finally unveiled the Instinct MI300 accelerator family, designed to handle massive workloads in AI applications. The MI300 is expected to outperform its rivals in AI inference workloads after model training, with industry-leading capacity and bandwidth according to AMD CEO Lisa Su, potentially challenging Nvidia's dominance.

While some of AMD's valuation multiples also seem high, the stock is priced more reasonably than ARM at current levels, based on its forward price/sales ratio of 12.68 and PEG ratio of 1.15.

Analysts' sentiment towards AMD is overwhelmingly positive, with a consensus of "strong buy". Out of 33 analysts, 27 recommend "strong buy", 1 suggests "moderate buy", and 5 suggest "hold". However, like ARM, AMD is currently trading above Wall Street's average price target of $187.17.

Which AI chip stock is the best buy right now?

In the battle of AI chip stocks, both ARM Holdings and AMD present attractive opportunities, but AMD emerges as the more appealing option at this time. While ARM's innovative chip architecture positions it well for the AI era, its sky-high valuation raises concerns about the sustainability of its rally.

AMD, on the other hand, has a more reasonable valuation in relation to its growth prospects and also has a strong presence in the AI chip market. At current levels, AMD appears better positioned to outperform ARM in the short term, making it the best option for investors looking for exposure to the AI chip market.