Fire arms (NASDAQ: ARM) And Intel (NASDAQ:INTC) are two of the world’s largest chipmakers. Arm is the world’s leading designer of mobile processors, while Intel is the world’s largest producer of PC and server processors.
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 enabled its major customers, including QualcommMediaTek and Apple — to conquer the smartphone chip market.
Intel, which has stubbornly tried to miniaturize its PC-oriented x86 processors for mobile devices, has failed to keep pace with Arm-based chipmakers.
Arm went public again last September, seven years after it was acquired by SoftBank. Its stock price has more than tripled from its $51 IPO price to nearly $160 today. Intel shares have fallen about 20% over the same period. Let’s take a look at why Arm has outperformed Intel by such a wide margin — and whether it could remain the better buy for the foreseeable future.
Why did Arm stock skyrocket?
Arm has no serious competitors in its core market: its dominant chips are used in about 99% of high-end smartphones. However, this means that Arm’s sales fluctuate based on the cyclical demand for new smartphones.
Arm is designing new chips for the cloud and automotive markets, and expects these high-growth sectors to gradually reduce its reliance on smartphones. The company also anticipates growing demand for its higher-royalty artificial intelligence (AI)-powered Armv9 chip designs to drive 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 5G Market The company’s revenue grew but fell 1% in fiscal 2023 as the 5G upgrade cycle slowed. In fiscal 2024, its revenue grew 21% as the smartphone market stabilized as the company expanded its share in the automotive and cloud markets and licensed more AI-oriented chips.
For fiscal 2025, Arm expects revenue growth of 18% to 27% and adjusted EPS growth of 14% to 30%. This acceleration appears to be a balanced way to benefit from the long-term expansion of the mobile, cloud and AI markets.
But at $160 a share, Arm is already trading at more than 100 times the midpoint of its estimated earnings this year. That inflated valuation suggests there’s a little too much hype around AI. included in its priceeven though it is not growing as fast as market leaders such as Nvidia.
Why did Intel’s stock fall?
Intel still controls 64% of the x86 processor market, according to PassMark Software, but it has ceded significant share to AMD over the past eight years. While Intel has been working to make smaller, denser, more power-efficient processors in-house, AMD has been outsourcing its production Semiconductor Manufacturing in TaiwanIntel then fell behind TSMC in the process race as it struggled with chip delays and shortages, and AMD pulled ahead with cheaper, more advanced processors.
Intel’s revenue grew 1% in 2021, but declined 20% in 2022 and another 14% in 2023. The slowdown was driven by weak PC sales, intense competition from AMD, and the data center market’s focus on buying Nvidia GPUs to handle AI tasks instead of upgrading their older processors. As Intel contends with these headwinds, it is trying to modernize its own foundries to catch up with TSMC, but the costly expansion effort is crushing its operating margins.
The picture looks bleak, but analysts expect Intel’s revenue and earnings to grow 3% and 4%, respectively, in 2024 as the PC market stabilizes, the company ramps up its Meteor Lake chip shipments, and the macroeconomic environment improves. Bulls expect Intel’s growth to accelerate in 2025 if it finally catches up to TSMC, but its stock is not a bargain at 29 times forward earnings. The company also cut its dividend last year, and its 1.6% forward yield won’t attract serious income-seeking investors.
Best 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 faces no existential threats. Intel isn’t at its bottom yet, but it either needs to catch up to TSMC or become fabless like AMD to impress the bulls again.
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Sun Leo 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 January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a position in Apple. disclosure policy.
Best Chip Stocks: Arm Holdings vs. Intel was originally published by The Motley Fool
