In this piece, I evaluated two semiconductor stocks, NVIDIA (NASDAQ:NVDA) and Arm Holdings (NASDAQ:ARM), using TipRanks’ comparison tool to determine which is better. A closer look suggests a neutral view for NVIDIA and a bearish view for Arm.
NVIDIA designs and manufactures graphics processors, chipsets, and related software through its two segments: Graphics and Compute & Networking. Arm Holdings designs and licenses high-performance, low-cost, and energy-efficient central processing units, better known as CPUs, and related technology.
Shares of NVIDIA are already up 59% year-to-date and have gained 63% over the last three months. Meanwhile, Arm Holdings stock has skyrocketed 93% year-to-date and rallied an astonishing 138% over the last three months.
With Arm stock up more than twice as much as NVIDIA stock over the last three months, a closer look is needed to determine and whether that difference is warranted.
Both companies are profitable, so we’ll compare their price-to-earnings (P/E) ratios to gauge their valuations against each other and against that of their industry. For comparison, the semiconductor industry is trading at a P/E of 56 versus its three-year average of 31.8.
NVIDIA (NASDAQ:NVDA)
At a P/E of 66.1, NVIDIA is trading at a premium to the semiconductor industry and at a discount to Arm. However, given NVIDIA’s blowout earnings results and its low forward P/E, that premium appears warranted, especially considering its long-term share-price gains. However, the chipmaker’s stock has been overbought for some time, so a neutral view seems appropriate — pending a more attractive entry price that should materialize in a correction.
NVIDIA has enjoyed explosive earnings and sales growth, as the demand for chips equipped to support AI operations has skyrocketed. In the fourth quarter, the chipmaker’s revenue surged 265% to $22.1 billion, including a 409% surge in Data Center sales, which includes AI chips. NVIDIA’s adjusted profits jumped 486% year-over-year, while its GAAP (generally accepted accounting principles) profits rose 765% to $4.93 per share.
Notably, NVIDIA’s forward P/E is only 32.1. Normally, I don’t put too much stock in forward P/E multiples because they can often be based on speculation, but in a “magnificent” giant like NVIDIA, I will make an exception.
However, NVIDIA stock is now moving deeper into overbought territory with its relative strength index of 74. In fact, the stock is more overbought now than it has been since last July, when it had an RSI of 74.77, suggesting the clock is ticking on the next correction. Thus, investors who watch and wait patiently and play their cards right should be able to scoop up some shares of NVIDIA at a nice discount in the near future.
However, even at current prices, investors who can stomach the possibility of white-knuckling a correction in the near future probably won’t lose out, given the stock’s eye-watering long-term gains. NVIDIA shares are up 1,945% over the last five years and 18,103% over the last 10, making this stock one to buy and hold, in my opinion — maybe even for as long as you own stocks.
What Is the Price Target for NVDA Stock?
NVIDIA has a Strong Buy consensus rating based on 38 Buys, two Holds, and zero Sell ratings assigned over the last three months. At $867.93, the average NVDA stock price target implies upside potential of 9.7%.
Arm Holdings (NASDAQ:ARM)
At a trailing P/E of 1,657, Arm Holdings looks incredibly overvalued, even considering its forward P/E of 99.5. While this company isn’t going anywhere and is absolutely worth owning at some point, investors may want to reconsider paying such high multiples for a company with quarterly earnings results that are a fraction of NVIDIA’s. Thus, a bearish view seems appropriate — with a revisit required if or when a correction occurs.
Arm is also near overbought territory with an RSI of 67, presumably due to its strong earnings results. Citing robust demand for the company’s “more advanced” CPUs designed for AI, Arm management said a faster-than-expected shift to their AI offerings gave their latest quarter a boost, increasing the company’s Licensing revenue by 18% year-over-year to $354 million.
or the most recent quarter, the company reported $824 million in sales versus its previous guidance of between $720 million and $800 million in revenue and the consensus estimate of $762.5 million. That also represented a 14% year-over-year gain, which is nothing to sneeze at but pales in comparison to NVIDIA’s monster growth on top of an already large base in its last quarter.
Arm also boosted its guidance and is now looking for a 30% year-over-year increase in Royalty revenues for the current quarter and mid-single-digit increases quarter-over-quarter. The company also set a new range of $850 million to $900 million in revenue for the current quarter versus the consensus estimate of $779 million.
There’s no doubt that Arm’s results were excellent and indicative of a company with a bright future. However, its valuation has just gotten too far ahead of itself, so I’d like to see a much lower price before becoming more constructive on the shares.
What Is the Price Target for ARM Stock?
Arm Holdings has a Moderate Buy consensus rating based on 10 Buys, four Holds, and one Sell rating assigned over the last three months. At $100.29, the average Arm Holdings stock price target implies downside potential of 28.1%.
Conclusion: Neutral on NVDA, Bearish on ARM
NVIDIA and Arm Holdings are undoubtedly both companies deserving of positions in most investors’ portfolios. In fact, NVIDIA’s valuation isn’t terrible, even after its recent run-up, but its overbought status suggests a correction could be coming soon, presenting an attractive buy-the-dip opportunity.
On the other hand, Arm Holdings’ valuation has gotten ahead of itself and also looks due for a correction. Thus, the stock may be worth revisiting if or when that correction occurs — if it results in a steep enough pullback.
