A couple of years ago, semiconductor specialist Nvidia attempted to amass a little-known company called Arm Holdings (NASDAQ: ARM).
Unfortunately for Nvidia, the company abandoned the deal as long-winded court cases revolving around antitrust concerns gave the impression to haven’t any end in sight. Following the failed acquisition, Arm pursued an initial public offering (IPO) — hitting the Nasdaq last September.
Since going public, Arm stock has surged 138% on the backdrop of the unreal intelligence (AI) movement. But even after such a meteoric rise, I see quite a bit higher days ahead for Arm. The reality is, I feel Arm stock will handily outperform Nvidia over the following decade.
Below, I’ll detail why I’m so bullish on Arm and explain how rising competition inside the chip realm could ignite Nvidia’s first uphill battle in quite some time.
Why Arm stock might outperform Nvidia
The semiconductor industry has many various components. Not all chip corporations make graphics processing units (GPUs) like Nvidia or Advanced Micro Devices. There are rather more applications for chips, and Arm dominates a fairly singular pocket of the market.
At its core, Arm designs chip architecture for mobile devices, consumer electronics, networking equipment inside data centers, and other Web of Things (IoT) devices. The company makes money from licensing out its mental property (IP), and earns a royalty based on its various architectures.
As illustrated inside the graphic above, Arm’s architecture is deeply embedded across various applications. This provides the company with an enviable level of flexibility regarding latest chips hitting the market in the long term. In other words, corporations running on Arm’s architecture are less inclined to develop a modern hardware and software system that’s incongruent with Arm’s architecture.
Furthermore, the slide above shows that Arm’s market share has increased across the board over the past two years. With that in mind, I feel the company is well positioned to proceed benefiting from latest chip-based devices, since Arm’s IP is already leveraged across so many devices across the globe.
For that reason, I see Arm as less vulnerable to competitive forces inside the chip space as compared with peers comparable to Nvidia.
Why Nvidia’s best days is also inside the rearview mirror
Like Arm, Nvidia has an unlimited presence in its core end market. The company’s A100 and H100 chipsets have helped Nvidia acquire an estimated 88% of the GPU market.
Nevertheless, I see some obvious risks that may expose Nvidia over the following several years, and I won’t be surprised to see the company begin to lose market share.
First, corporations including Microsoft, Alphabet, Tesla, Amazon, and Meta Platforms are all investing of their very own custom chip designs. Moreover, these corporations have been labeled by Wall Street analysts as Nvidia’s largest customers — accounting for nearly half of the company’s revenue.
While you may argue that more competition is an important thing for Nvidia, I don’t see it that way on this case. These corporations will probably remain customers of Nvidia for the following several years, nevertheless the introduction of their very own hardware could wind up being a bargaining chip in the long run.
What I mean by that’s that more GPUs within the marketplace will likely weaken Nvidia’s pricing power. In turn, I feel Nvidia’s revenue and profit growth could have a dramatic slowdown — a dynamic that growth investors won’t want to see.
But rising competition will not be the one risk facing Nvidia. Given the company’s near-monopoly position, there’s a possibility that the Department of Justice (DOJ) could investigate Nvidia’s business practices and force the company to loosen up its ecosystem.
With so many unknowns revolving around Nvidia’s future, I’m skeptical that the stock is a no brainer at this juncture.
Is Arm stock a buy without delay?
There have been many periods of expansion and contraction in Arm’s trading activity. But with a forward price-to-earnings (P/E) multiple of 96, it’s hard to say the stock is inexpensive.
The forward P/E of the S&P 500 is about 23, lower than one-quarter that of Arm.
Here’s how I give it some thought: The market is clearly placing a premium on Arm stock for a reason. I feel there are two core themes to unpack.
At a macro level, AI appears to be here for the long run, and technology’s biggest corporations are committed to spending billions on future artificial intelligence initiatives. While spending will change from yr to yr, the secular tailwinds presented by AI should bode well for Arm.
At a company-specific level, Arm’s unique position inside the chip space and its lucrative business model suggest that the company’s growth will remain robust over time.
For these reasons, I see Arm since the superior investment over Nvidia in the following decade. While the stock will not be a bargain, I feel it still looks like a compelling opportunity for long-term investors.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Idiot’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Idiot’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Idiot has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Idiot recommends the subsequent options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure policy.
Prediction: This Artificial Intelligence (AI) Stock Will Outperform Nvidia Over the Next Decade was originally published by The Motley Idiot