Better stock for artificial intelligence: Nvidia vs. Arm Holdings

The trend towards artificial intelligence has accelerated the growth of many technology stocks over the past year, including the semiconductor giants NVIDIA (NVDA 2.73%) And Arm Holdings (ARM 2.51%)So far in 2024, Nvidia shares are up 144% and Arm shares are up 91%.

Nvidia is the leading supplier of semiconductors used for AI software. Its GPUs (graphics processing units) have been bought in bulk for use in data centers built for cloud computing – ideal places to house AI systems that require massive processing power. Arm, on the other hand, is a leader in mobile device technology.

According to a forecast by Statista, the AI ​​market will grow from $136 billion in 2023 to $827 billion in 2030 – and both companies are positioned to see years of revenue growth as a result. But if you only want to invest in one of them now, which AI stock would be a better choice to hold for the long term?

This speaks for Nvidia

The current rush by companies to build AI systems has created huge demand for Nvidia's semiconductor products, as the company is a pioneer in accelerated computing. This technology niche focuses on processing power and high speed – the key qualities needed to support AI software.

Nvidia developed the GPU in 1999 to speed up computer processing. Recently, CEO Jensen Huang realized that GPUs would be ideal for AI, so in 2016 he personally delivered the world's first AI supercomputer to OpenAI, the developer of ChatGPT.

Since then, organizations around the world have rushed to buy Nvidia's cutting-edge GPUs. National governments, including those of the United Kingdom and Japan, are also using Nvidia chips to build AI supercomputers.

Because demand for its products exceeds supply, Nvidia has been able to achieve astonishing year-over-year revenue increases over several quarters.

Data source: Nvidia. YOY = Year over year.

In addition, the company's finances are excellent. In the fiscal second quarter ended July 28, Nvidia had total assets of $85.2 billion on its balance sheet, against $27.1 billion in liabilities. And during that period, net income increased 168% year over year, to $16.6 billion.

Huang believes all data centers will move to an accelerated computing model. He compares the transition to a modern equivalent of the Industrial Revolution, which will allow data centers to use AI to perform tasks at scale, just as industrialization allowed workers in the 18th century to scale their production.

If he is right, the move to these “AI factories,” as he calls them, will open up a cloud computing market for Nvidia’s products worth nearly $600 billion.

The case for Arm Holdings

Arm is known for its energy-efficient semiconductor chip designs that dominate the mobile device market. With the rise of energy-hungry AI applications, demand for Arm's low-power architectures has increased, leading to a whopping 39% year-over-year jump in revenue to $939 million in the first quarter of fiscal 2025, which ended June 30. That was the fourth consecutive quarter of record revenue.

Arm generates revenue by licensing its technology and also collects royalties on any devices it sells that use the technology. Thanks to AI-related demand, these revenue streams are expected to grow.

For example, the computing power requirements of AI require more cores per computer chip. A core is the component that performs calculations and executes tasks. In 2016, Arm's high-end cloud computing chips used eight cores. Today, AI requires 192 cores per chip.

This has dramatically increased Arm's revenue, and management expects revenue of at least $3.8 billion in fiscal year 2025, a double-digit increase from fiscal year 2024's $3.2 billion.

Arm's strong revenues led to solid financials. The company closed the first quarter of fiscal 2025 with total assets of $7.9 billion, compared to total liabilities of $2.2 billion. Net income more than doubled from $105 million in the same period last year to $223 million.

Decision between Nvidia and Arm Holdings shares

When comparing these two semiconductor titans, one of them is clearly the better investment choice right now for several reasons: Nvidia.

First, the company ranks highest on price-to-earnings (P/E) ratio, a widely used valuation metric. Arm's P/E of 360 is far higher than Nvidia's 55, suggesting that Arm's stock is comparatively overpriced.

Moreover, Arm's diluted earnings per share (EPS) have seen ups and downs since its 2023 IPO despite revenue growth. Meanwhile, Nvidia's diluted earnings per share have skyrocketed.

Data from YCharts.

Another factor to consider is each company's long-term growth prospects. The huge data center market is driving Nvidia's business. In the fiscal second quarter, data center revenue accounted for $26 billion of the company's record $30 billion in revenue.

Meanwhile, mobile devices are Arm's bread-and-butter market. As the company reiterated in its latest quarterly report, “Our products are used in almost all smartphones.” The largest smartphone market is currently China, but smartphone sales there are slowing due to market saturation.

Nvidia's leadership position in the lucrative cloud market, its strong revenue and EPS growth, and its better valuation make the company a better long-term investment at present.