Since there have been reports about it Arm stocks (POOR 1.40%) was the re-entry into the public markets, the inevitable comparisons too Nvidia (NVDA -0.37%) started. This is understandable to a certain extent. After all, both are semiconductor designers and are among the most respected and successful in their field. It wasn’t long ago that Nvidia announced plans to acquire Arm in a $40 billion deal before the deal was overturned by regulators.
With Arm’s initial public offering (IPO) now in the rearview mirror, the company has released its first financial report as a publicly traded company. Let’s look at the results while highlighting some key similarities and differences between Nvidia and Arm.
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Arm’s solid financial results
In the second quarter of fiscal 2024 (ending September 30), Arm posted record quarterly revenue of $806 million, up 28% year over year. The results were driven by several long-term licensing agreements signed by “industry-leading technology companies.”
Unfortunately, a significant increase in operating expenses weighed on the bottom line, resulting in a net loss under generally accepted accounting principles (GAAP) of $110 million, compared to a profit of $114 million in the year-ago quarter. At the same time, Arm’s operating cash flow increased 199% year over year at $227 million, while free cash flow increased 291% at $169 million.
Other metrics suggested a strong pipeline for future growth. Arm’s remaining performance obligation (RPO) – which includes contractually obligated sales not yet included in revenue – rose to $2.4 billion, up 38% year-over-year.
For the coming quarter, Arm forecasts revenue of around $760 million at the midpoint of its forecast, a slowdown from the current quarter and below the $768 million expected by analysts.
A comparison of apples and oranges
To get a sense of Arm’s performance, let’s compare it to Nvidia’s recent results. In the second quarter of fiscal 2024 (ended July 30), Nvidia posted record revenue, rising 101% to $13.5 billion, while net profit rose 843% to $6.2 billion.
For the coming quarter, Nvidia expects more of the same, forecasting record revenue of $16 billion, up 318% year over year and up 18% quarter over quarter, driven by soaring demand for its AI chips . While Nvidia benefits from slight competition due to last year’s downturn, the results are still notable.
The comparison between apples and oranges is immediately clear. Nvidia generated nearly 17 times the revenue that Arm did, and was ridiculously profitable to boot. The reason for the apparent inequality lies in the companies’ different business models.
Arm doesn’t actually make chips, but rather designs the designs used to build them. It then licenses the plans and other intellectual property to technology companies to incorporate into their products, collecting royalties and licensing revenue in the process. As a result, sales and earnings tend to be significantly lower. Nvidia also develops semiconductors, but then subcontracts the manufacturing of these chips to foundries and sells the finished product directly to consumers and businesses. This leads to significantly higher sales and profit figures.
There is another important difference. Nvidia pioneered the modern graphics processing unit (GPU), which has become essential for artificial intelligence (AI) and data centers. Arm is particularly famous for the central processing unit (CPU), which is installed in around 90% of all smartphones worldwide. While the AI processor market is currently experiencing triple-digit growth, the smartphone market is expected to see steady but unremarkable single-digit growth in the coming years.
It’s also worth mentioning that Nvidia is an Arm customer. The company’s recently released Grace Hopper H200 AI superchip is based on Arm’s architecture. So while Arm is certainly enjoying the fruits of the AI revolution, Nvidia is better positioned to reap the current windfall.
AI is the wild card
In regulatory filings leading up to its IPO, Arm described itself as “the world’s most widely used CPU architecture.” The company also said it has shipped 250 billion processors since its inception, including 30.6 billion in fiscal 2023. The company said: “We design, develop and license high-performance, cost-effective and energy-efficient CPU products.”
Additionally, Arm mentioned AI dozens of times in the same filing, noting that Arm CPUs were already running AI on “billions of devices, including smartphones, cameras, digital TVs, cars, and cloud data centers.” The company’s latest chipset – which can be combined with a GPU in a variety of mobile devices – focuses on the same low power efficiency that has made it a staple in smartphones. However, Arm has a lot of competition from the likes Intel And modern micro deviceswho are both working feverishly on energy-efficient CPUs for the AI market.
There’s still an opportunity for Arm to benefit from AI, but it could take years for it to materialize. The potential for AI technology to take hold on mobile devices or “at the edge” could increase demand for Arm products in the coming years. For now, however, AI is making its way into the cloud, which is Nvidia’s domain.
So is it time to invest in Arm stocks? While the company will certainly benefit from increasing AI adoption, it will likely never be a direct competitor to Nvidia. Additionally, Nvidia and Arm currently have similar valuations, with each selling for around 15x forward sales. I would much rather put my hard-earned investments into a company that is achieving strong triple-digit growth than one that is down in the low double-digit range. For my money, Nvidia has better prospects and is therefore the better buy.
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