The Nasdaq-100 tracks the 100 largest non-financial companies on the Nasdaq Stock Exchange. The index is heavily weighted toward the technology sector and includes some of the most innovative companies in the world.
The Nasdaq-100 returned 18% in the first half of 2024 on excitement about artificial intelligence (AI). Investors showed particular favoritism toward two AI semiconductor stocks. Nvidia (NASDAQ: NVDA) And Arm positions (NASDAQ:ARM) led the Nasdaq-100 higher, with shares rising 150% and 122%, respectively, during the first half.
Wall Street is less optimistic about their prospects in the second half, especially for Arm. Nvidia has a median price target of $128 per share, which implies an upside of 3% from the current price of $124 per share. But Arm has a median price target of $120 per share, which implies a 28% decline from the current price of $167 per share.
Here’s what investors need to know.
Nvidia: The market leader in data center GPUs and AI processors
Nvidia designs graphics processing units (GPUs), chips that have become the gold standard in accelerating data center workloads such as artificial intelligence (AI). The company accounted for 92% of data center GPU sales last year and Forrester Research recently wrote: “Nvidia is setting the pace for AI infrastructure worldwide. Without Nvidia GPUs, modern AI would not be possible.”
Nvidia has further cemented its GPUs as the industry standard in AI computing by branching out into other hardware markets. The company’s networking solutions recently surpassed $13 billion in annual revenue. And the Grace Central Processing Unit (CPU) – Nvidia’s first data center server CPU – is moving toward a multi-billion dollar product line, according to CEO Jensen Huang.
Nvidia also offers subscription software and cloud services that allow developers to train large language models (LLMs) and other machine learning models (MLMs) and build all kinds of AI applications. That part of its business recently surpassed $1 billion in annual sales. According to analysts, Nvidia faces a nearly insurmountable economic disadvantage in its ability to pair superior hardware with software and services that support AI projects.
Going forward, Wall Street expects Nvidia to grow non-GAAP earnings per share (EPS) at 33% per year through fiscal 2028 (end of January 2028). In that context, the current valuation of 69 times earnings is less expensive than it seems. These figures give a PEG ratio (the price-to-earnings ratio divided by expected earnings growth) of 2.1, which is a significant discount to the three-year average of 3.1.
I’ve been a shareholder in Nvidia since 2017, and I’m comfortable with the size of my position. But if my portfolio didn’t have Nvidia exposure, I’d feel comfortable buying a small position today, despite the muted, short-term outlook among Wall Street analysts.
Arm Holdings: The Market Leader in Smartphone and Mobile Processors
Arm develops and licenses CPU products and development tools for customers such as Apple, Amazonand Nvidia. These companies use Arm technology to design custom chips and systems that address different use cases. For example, the Arm Cortex processors are optimized for smartphones and mobile devices, while the Neoverse processors are optimized for cloud computing workloads such as artificial intelligence.
Each processor has an instruction set architecture that defines how the hardware and software interact with each other. Arm architecture has historically been associated with energy efficiency, so Arm has a 99% market share in smartphones and over 60% in other mobile devices. But the x86 architecture used by Intel And AMD has traditionally been associated with computing power, making these companies dominate the PC and data center markets.
While Intel and AMD have failed to gain ground in the mobile processor market, Arm has improved the computing performance of its CPUs and gained market share in consumer electronics and cloud computing. For example, Apple M-series chips and Amazon Graviton processors are built on Arm architecture, just like Nvidia Grace CPUs and Nvidia Grace Blackwell Superchips.
Arm reported solid financial results in the fourth quarter of fiscal year 2024 (ended March 31), beating both top and bottom line expectations. Revenue rose 47% to $928 million, and non-GAAP net income improved to $0.36 per diluted share, up from $0.02 per diluted share in the prior year. But management expects momentum to slow. Guidance calls for revenue growth of 22% in fiscal year 2025.
Going forward, Wall Street expects Arm to grow adjusted earnings per share at 23% per year through fiscal 2028 (end of March 2028). That consensus estimate makes the current valuation of 131 times earnings look outrageously expensive. Remember how Nvidia has a PEG ratio of 2.1? Well, Arm has a PEG ratio of 5.7.
Arm is an excellent company with attractive growth prospects. Wall Street may or may not be right about the sharp decline in Arm stock in the coming months. but I plan to avoid this stock until it trades at a lower valuation.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Amazon, Apple, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
2 AI Semiconductor Stocks Soared 150% and 122% in the First Half of 2024. Wall Street Says 1 Could Crash in the Second Half was originally published by The Motley Fool
