Arm Holdings (ARM -1.21%) And Advanced micro devices (AMD -1.50%) have experienced different stock market developments in 2024: One of these companies has posted healthy gains so far this year, while the other has underperformed the broader semiconductor market.

Arm stock has risen 50% this year. AMD, on the other hand, has lost 10% of its value, compared to the 10% gains of PHLX Semiconductor Sector Index. It is noteworthy that both companies are benefiting in different ways from the growing demand for artificial intelligence (AI) chips.

Here’s a closer look at Arm and AMD’s AI-related prospects to help you figure out which of these two companies is currently worth your money.

The case for Arm Holdings

Arm Holdings does not manufacture chips. Instead, the company licenses its chip architecture and intellectual property (IP) to chipmakers and original equipment manufacturers (OEMs), who use Arm’s designs to manufacture a wide range of chips, such as central processing units (CPUs), graphics processing units (GPUs), and smartphone processors.

This puts the British company in a solid position to capitalize on the long-term growth of the semiconductor market, which has seen a nice rebound thanks to AI. So it was no surprise that Arm reported record revenue of $939 million in the first quarter of fiscal 2025 (ended June 30), an impressive 39% increase over the same period last year.

Arm’s licensing revenue rose a solid 72% year-over-year to $472 million. The company attributed this huge increase to “several high-value licensing agreements” and increased demand for Arm’s technology in AI-related applications. In addition, Arm’s adjusted earnings rose 67% year-over-year to $0.40 per share in the latest quarter.

The company announced that it ended the fiscal first quarter with 33 Arm Total Access (ATA) licenses, compared to 20 in the same period last year. ATA provides Arm customers with an end-to-end platform that enables them to develop complex chip systems and shorten their time to market. This explains why Arm is seeing more customers adopting its AI-focused Armv9 architecture, especially in the smartphone space.

Arm now derives a quarter of its licensing revenue from the Armv9 architecture, up from 20% in the previous quarter. In addition, the company estimates that a whopping 100 billion Arm-based AI chips could be shipped by the end of fiscal 2026. The healthy growth among Arm’s licensees also explains why remaining performance obligations (RPOs) rose 29% year-over-year to $2.17 billion last quarter.

This metric represents the revenue Arm will generate in future quarters, suggesting that the company is building a healthy revenue pipeline over the long term. Not surprisingly, analysts expect Arm’s earnings growth to accelerate.

ARM EPS estimates for the current fiscal year, data from YCharts

Moreover, the company is expected to post a nice annual earnings growth rate of 31% over the next five years. This seems possible thanks to the AI-driven growth in the semiconductor market.

This speaks for AMD

AMD stock may have underperformed the market this year, but investors cheered the company’s recent results as sales of its data center chips grew at a respectable pace. Although AMD’s total revenue in the second quarter rose just 9% year over year to $5.84 billion, revenue from its data center business rose a whopping 115% year over year to $2.8 billion.

AMD benefited from rising demand for its data center CPUs and GPUs, which are used in servers supporting AI workloads. In the last earnings call, CEO Lisa Su noted, “We delivered record data center GPU revenue for the third consecutive quarter, with MI300 quarterly revenue exceeding $1 billion for the first time.” Microsoft have expanded their use of MI300X accelerators to power GPT-4 Turbo and several copilot services, including Microsoft 365 Chat, Word, and Teams.”

Su added that AMD’s “enterprise and cloud AI customer pipeline grew in the quarter” and the company is working to produce more of its MI300 AI accelerators to meet solid end-market demand. AMD now expects to sell at least $4.5 billion worth of data center GPUs in 2024, $500 million more than its previous forecast. That’s more than double the company’s original $2 billion forecast released in October last year.

However, this is not the only business segment where AMD is seeing an AI-related boost. The company’s revenue in the consumer segment grew 49% year-over-year to $1.5 billion, driven by a recovery in the PC market, where sales of AI-enabled offerings are soaring. The company offers CPUs with dedicated AI processors built in, and that seems to be a smart move, as AI PC sales are expected to grow 44% annually through 2028, according to Canalys.

AMD notes that its AI-powered Ryzen processors will be used in more than 100 PC designs in the next few quarters, suggesting that its customer segment could continue to grow at a healthy pace. Not surprisingly, AMD’s revenue growth rate is expected to double from the 13% increase forecast for this year to $25.7 billion to 28% by 2025. Revenues, on the other hand, are expected to grow at a compound annual rate of 33% over the next five years.

So AI is likely to lead to a significant improvement in AMD’s growth. But is the company a better choice than Arm? To find out, let’s take a closer look at their valuations.

The verdict

Arm is growing faster than AMD, but it is also quite expensive. Arm has a price-to-sales ratio of 32, while AMD’s sales multiple is 9. And also AMD’s earnings multiple of 38 is much lower than Arm’s multiple of 70.

Both companies are forecast to have identical earnings growth over the next five years. Of course, Arm is currently the fastest growing company, but AMD’s growth should increase significantly as it serves some solid AI-related markets in the form of data center accelerators and PCs.

Investors looking to add a decent value AI stock to their portfolio would do well to buy AMD now.