Grand View Research predicts that sales of artificial intelligence (AI) chips will grow 29% annually through 2030. Semiconductor companies Nvidia (NASDAQ: NVDA) And Arm positions (NASDAQ:ARM) are major players in that market, and the shares are up 166% and 100% year to date, respectively. But most Wall Street analysts expect stocks to move in opposite directions over the next year.
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Nvidia has an average 12-month price target of $150 per share. That implies an upside of 15% from the current share price of $131.
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Arm has an average 12-month price target of $144 per share. That implies a 5% downside to the current share price of $151.
Going forward, Nvidia and Arm should benefit as companies continue to build out their AI infrastructure, but that doesn’t necessarily make them good investments. Here are the important details.
1. Nvidia
Nvidia has a 98% market share in data center graphics processing units (GPU), chips used to accelerate compute-intensive workloads such as training machine learning models and running artificial intelligence (AI) applications. That dominance has been more than a decade in the making. In 2006, Nvidia introduced its CUDA programming model, which has grown into an unparalleled ecosystem of software development tools for GPU programmers.
More recently, Nvidia has added networking equipment and central processing units (CPUs) to its hardware portfolio, and introduced software and cloud services that simplify the development of AI applications. While many investors think of Nvidia as a chipmaker, in that context it is more accurately an “accelerated computing” company. And the ability to innovate across the entire data center computing stack – from hardware to software to services – puts Nvidia in a competitive position.
Nvidia exceeded expectations with its financial results in the second quarter of fiscal 2025 (ending July 2024). Revenue rose 122% to $30 billion thanks to strong demand for AI chips, networking and enterprise software. And non-GAAP net income rose 152% to $0.68 per diluted share. Management also provided stronger guidance than Wall Street expected, with third-quarter revenue expected to rise 80%.
It goes without saying that Nvidia has huge opportunities in AI, but the broader data center accelerator market is just as important. “We are at the beginning of our journey to modernize $1 trillion in data centers, from general-purpose computing to accelerated computing,” CEO Jensen Huang recently told analysts. He expects this transition to take place over the next four to five years.
Wall Street expects Nvidia’s adjusted profits to rise 35% annually through fiscal 2027 (end of January 2027). That makes the current valuation of 59 times adjusted earnings seem reasonable. Personally, I think Nvidia is a stock to own given its level of participation in the AI economy, not to mention its leadership in the data center accelerator market. The current price is a reasonable entry point for patient investors.
2. Gun ownership
Arm develops architectures for central processing units and licenses its intellectual property (IP) to customers, who use the IP to build custom chips for a wide range of end markets, from mobile devices and industrial sensors to data center infrastructure. Arm also offers development tools that simplify writing and debugging applications.
Arm CPUs are known for their low-power architecture, which has helped the company gain a leading position in mobile devices. Most importantly, Arm has over 99% market share in smartphone processors. However, the company is also gaining market share in data centers and personal computers (PCs) as the chip becomes increasingly powerful.
Arm is well positioned to benefit as the artificial intelligence boom progresses. The CPUs are the basis of Apple Intelligence; they perform simple AI tasks on devices such as iPhones and more complex AI tasks on private data center servers. The major public clouds (Amazon Web services, Microsoft Azure, and Alphabet‘s Google Cloud Platform) have designed Arm-based server CPUs. And several computer manufacturers have introduced AI PCs powered by Arm processors.
Arm reported solid financial results in the first quarter of fiscal 2025 (ending June 2024), exceeding expectations on the top and bottom lines. Revenue rose 39% to $939 million due to momentum in the smartphone and cloud computing markets, which itself was driven by strong adoption of Arm’s latest architecture (Armv9). Meanwhile, non-GAAP net income rose 67% to $0.40 per diluted share.
Wall Street expects Arm’s adjusted earnings to grow 27% annually through fiscal 2027 (end of March 2027). That estimate makes the current valuation of 107 times adjusted earnings look outrageously expensive. So I think potential investors should stay on the sidelines for now, and current shareholders should consider trimming their positions, especially if those positions make up a substantial portion of their portfolios.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennevine has positions at Amazon and Nvidia. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Nvidia Stock vs. Arm Stock: Wall Street Says Buy One and Sell the Other was originally published by The Motley Fool
