Better Artificial Intelligence Stock: Nvidia vs. Arm Holdings

The artificial intelligence trend has supercharged the growth of many tech stocks over the past year, including semiconductor giants Nvidia (NASDAQ: NVDA) and Arm Holdings (NASDAQ: ARM). So far in 2024, Nvidia shares climbed 144%, and Arm stock rose 91%.

Nvidia is the leading provider of the semiconductors used to power AI software. Its GPUs (graphics processing units) have been heavily purchased for use in data centers built for cloud computing -- ideal places to locate AI systems hungry for massive amounts of computer power. Arm, by contrast, is a leader in mobile device technology.

According to a forecast from Statista, the AI market will expand from $136 billion in 2023 to $827 billion by 2030 -- and both of these companies are positioned to enjoy years of sales growth as a result. But if you wanted to choose just one of them to invest in now, which AI stock would be the better pick to hold for the long haul?

The case for Nvidia

The current rush among organizations to build AI systems has created incredible demand for Nvidia's semiconductor products because it has been a pioneer in accelerated computing. This technological niche focuses on processing power and rapid speed, the key qualities needed to support AI software.

Nvidia created the GPU in 1999, supercharging computer processing. More recently, CEO Jensen Huang recognized that GPUs would be ideal to power AI. So in 2016, he hand-delivered the world's first AI supercomputer to OpenAI, the creator of ChatGPT.

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

As demand for its products has outstripped supply, Nvidia has achieved amazing year-over-year revenue growth across multiple quarters.

Data source: Nvidia. YOY = Year over year.

Not only that, the company's financials are excellent. In its fiscal second quarter, which ended July 28, Nvidia boasted total assets of $85.2 billion on its balance sheet compared to $27.1 billion in total liabilities. And, in the period, its net income rose 168% year over year to $16.6 billion.

Huang says he believes all data centers will transition to an accelerated computing model. He likens the transition to a modern equivalent of the Industrial Revolution, that will enable data centers to use AI to perform tasks at scale, just as industrialization enabled workers to scale their output in the 18th century.

If he's right, the transition to these "AI factories," as he calls them, will open up a nearly $600 billion cloud computing market for Nvidia's products.

The case for Arm Holdings

Arm is known for its energy-efficient semiconductor chip designs, which dominate the mobile device market. With the arrival of energy-hungry AI applications, Arm's power-saving architectures have experienced increased demand. This led to a whopping 39% year-over-year sales jump to $939 million in its fiscal 2025 Q1, which ended June 30. That was its fourth consecutive quarter of record revenue.

Arm generates revenue by licensing out its technology, and also collects royalties on all the devices sold that use that tech. Thanks to AI-related demand, these income sources are expected to grow.

For example, AI's processing power demands necessitate more cores per computer chip. A core is the component that performs calculations and executes tasks. Back in 2016, Arm's high-end cloud computing chips used eight cores. Now, AI requires 192 cores per chip.

This has dramatically amplified Arm's sales, and management expects to generate at least $3.8 billion in revenue in its fiscal 2025, a double-digit percentage increase from fiscal 2024's $3.2 billion.

Arm's strong sales translated into solid financials. The company ended fiscal 2025 Q1 with $7.9 billion in total assets compared to $2.2 billion in total liabilities. Its net income more than doubled to $223 million from the prior-year period's $105 million.

Deciding between Nvidia and Arm Holdings stock

In comparing these two semiconductor titans, one is clearly the superior investment choice right now, for several reasons: Nvidia.

First, it comes out on top based on price-to-earnings ratio (P/E ratio), a widely used metric to assess valuation. Arm's P/E ratio of 360 is far higher than Nvidia's 55, suggesting Arm's shares are comparatively overpriced.

In addition, since its 2023 IPO, Arm's diluted earnings per share (EPS) has seen ups and downs despite its sales growth. Meanwhile, Nvidia's diluted EPS has soared.

Data by YCharts.

Another factor to consider is each company's long-term growth outlook. The enormous data center market is driving Nvidia's business. In its fiscal Q2, data center revenue accounted for $26 billion of its record $30 billion in revenue.

Meanwhile, Arm's bread-and-butter market is mobile devices. As the company noted again in its latest quarterly report, "Our products are used in almost all smartphones." The biggest smartphone market today is China, but smartphone sales there are slowing due to market saturation.

Nvidia's leadership in the lucrative cloud market, its strong revenue and EPS growth, and its better valuation make it the better long-term investment now.

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Robert Izquierdo has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.