Arm Holdings (NASDAQ: ARM) And Intel (NASDAQ: INTC) are two of the world’s leading chipmakers. Arm is the world’s leading designer of mobile CPUs, while Intel is the largest producer of PC and server CPUs.
Arm only licenses its designs to other chipmakers, but Intel is an integrated device manufacturer (IDM) that designs, manufactures and markets its own chips. Arm’s flexible approach and power-efficient designs have attracted top customers, including QualcommMediaTek and Apple — to conquer the smartphone chip market.
Intel, which has doggedly tried to miniaturize its PC-focused x86 CPUs for mobile devices, has failed to keep pace with the ARM-based chip makers.
Arm re-listed last September, seven years after it was acquired by SoftBank. Shares have more than tripled from their IPO price of $51 to nearly $160 today. Intel’s shares have fallen about 20% over the same period. Let’s take a look at why Arm outperformed Intel so much — and whether it can remain the better buy for the foreseeable future.
Why did Arm’s stock value skyrocket?
Arm has no significant competitors in its core market; its dominant chip designs power about 99% of all premium smartphones. However, that means Arm’s sales fluctuate with the cyclical demand for new smartphones.
Arm has designed new chips for the cloud and automotive markets, expecting these higher-growth sectors to gradually reduce their reliance on smartphones. It also anticipates rising demand for its higher-royalty artificial intelligence (AI)-optimized Armv9 chip designs to fuel its near-term expansion into the smartphone, cloud and automotive sectors.
Arm’s revenue grew 33% in fiscal 2022 (which ended in March of that year) as the 5G market expanded, but fell 1% in fiscal 2023 as the 5G upgrade cycle cooled. In fiscal 2024, revenue rose 21% as the smartphone market stabilized, it expanded its share of the automotive and cloud markets, and it licensed more AI-oriented chips.
For fiscal 2025, Arm expects revenue to grow 18%-27%, while adjusted EPS will grow 14%-30%. That acceleration seems like a balanced way to capitalize on the long-term expansion of the mobile, cloud and AI markets.
But at $160 a share, Arm is already trading for more than 100 times the midpoint of its estimated earnings this year. That frothy valuation suggests there’s a bit too much AI hype in the price, even if it’s not growing as fast as market leaders like Nvidia.
Why did Intel’s stock price fall?
According to PassMark Software, Intel still holds 64% of the x86 CPU market, but the company has given up a lot of market share to AMD the past eight years. While Intel struggled to produce smaller, denser, and more power-efficient CPUs itself, AMD outsourced production to Taiwanese semiconductor productionIntel subsequently fell behind TSMC in the process race as the company struggled with delays and shortages in chip production. AMD took the lead with cheaper, more advanced CPUs.
Intel’s revenue rose 1% in 2021 but fell 20% in 2022 and fell another 14% in 2023. That slowdown was driven by sluggish PC sales, intense competition from AMD and the data center market’s focus on buying Nvidia’s GPUs to handle AI workloads rather than upgrading its older CPUs. With Intel facing these stiff headwinds, it’s been scrambling to upgrade its own foundries to catch up with TSMC, but the costly expansion effort is eating into its operating margins.
That picture seems bleak, but analysts expect Intel’s revenue and earnings to rise 3% and 4%, respectively, in 2024 as the PC market stabilizes, the company ramps up its Meteor Lake chips and the macro environment improves. Bulls expect Intel’s growth to accelerate in 2025 as it finally catches up to TSMC, but the stock is no bargain at 29 times forward earnings. It also cut its dividend last year, and its 1.6% forward yield won’t attract serious investors looking to make money.
The better buy: Arm
I’m not a fan of any of these chip stocks right now. But if I had to pick one over the other, I’d pick Arm because it’s growing much faster, has a wider moat, runs a high-margin business, and has no existential threats. Intel hasn’t gone under yet, but it needs to catch up to TSMC or become fabless like AMD to impress the bulls again.
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Leo Sun has positions in Apple. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long Jan 2025 $45 calls on Intel and short Aug 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
Better Chip Stock: Arm Holdings vs. Intel was originally published by The Motley Fool
