Intel (INTC +23.60%) and Arm Holdings (ARM +14.76%), two of the bellwethers of the semiconductor sector, recently plummeted after their latest earnings reports. Intel missed analysts' estimates on the top and bottom lines, suspended its dividend, and announced plans to lay off 15% of its global workforce to cut costs. Those disastrous developments cause its stock to sink 26% to its lowest levels in over a decade on Aug. 2.
Arm exceeded Wall Street's top- and bottom-line estimates, but its guidance missed the consensus forecast. Its stock dropped 16% on Aug. 1 after that report, then fell another 7% on Aug. 2 after Intel rattled the chip sector.
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Yet Arm's decline only erased about two months of its gains, and its stock remains up nearly 80% over the past 12 months. So should investors stick with Arm and stay far away from Intel?
What happened to Intel?
Intel, the world's largest producer of x86 CPUs for PCs and servers, is an integrated-device manufacturer (IDM) which designs and manufactures most of its chips at its first-party foundries. Its top competitor Advanced Micro Devices (AMD +13.91%) is a fabless chipmaker that outsources its production to third-party foundries like Taiwan Semiconductor Manufacturing (TSM +5.08%).
NASDAQ: INTC
Key Data Points
Over the past several years, Intel's foundries fell behind TSMC in the capital-intensive "process race" to manufacture smaller, denser, and more power-efficient chips. As a result, AMD -- which rebooted its chip strategy and tethered itself to TSMC's superior manufacturing processes -- pulled ahead of Intel by selling more advanced chips at lower prices.
Between the third quarters of 2016 and 2024, Intel's share of the x86 CPU market plunged from 82.5% to 63.7%, according to PassMark Software. AMD's share rose from 17.5% to 33.4%.
Intel went through three CEOs over the past six years as it dealt with that crisis. Brian Krzanich, who failed to leverage Intel's lead in PCs to expand into the mobile market, stepped down in 2018. His successor, Bob Swan, focused more on cutting costs and buying back shares instead of catching up to TSMC. Swan stepped down in early 2021 and was replaced by Pat Gelsinger, who wanted Intel to reclaim the process lead from TSMC by 2025.
Under Gelsinger, Intel initially ramped up its capex to upgrade its foundries to support those expansion plans. Unfortunately, the PC market's slowdown and the data center market's prioritization of Nvidia's (NVDA +4.30%) AI-oriented GPUs over its CPUs disrupted those plans. It also struggled to balance its expensive foundry expansion with its cost-cutting strategies.
Intel's revenue fell 20% in 2022 and dropped another 14% in 2023. Its revenue rose 4% year over year in the first half of 2024, but it expects a 5% to 12% decline in the third quarter, which douses any hopes for a quick turnaround. For now, analysts expect its revenue and earnings to both decline about 5% for the full year.
What happened to Arm?
Arm doesn't manufacture any chips like Intel. It only designs chips with its own architecture and licenses its designs to fabless chipmakers like Qualcomm, Apple, and MediaTek. Arm's architecture is less powerful but more power-efficient than the x86 architecture used by Intel and AMD, so its chips are better suited for mobile devices, cars, and other cloud-based devices. Its chips are now used in about 99% of all premium smartphones worldwide.
NASDAQ: ARM
Key Data Points
Arm was acquired by SoftBank (SFTB.Y +7.26%) in 2016 and spun off again in an initial public offering (IPO) last September. Nvidia, which once tried to buy Arm, remains one of its top investors.
Its revenue rose 33% in fiscal 2022 (which ended in March 2022) as the 5G market expanded but fell 1% in fiscal 2023 as that upgrade cycle cooled off. But in fiscal 2024, its revenue grew 21% again as the smartphone market stabilized, its customers developed more auto and cloud chips, and it licensed more AI-oriented designs. In the near term, Arm expects its higher-royalty, AI-optimized Armv9 designs to drive its growth across the smartphone, cloud, and auto markets. Over the long term, it expects the expanding cloud and auto markets to gradually reduce its dependence on smartphones.
Arm hasn't experienced any jarring management changes since its IPO. Its current CEO, Rene Haas, took the helm in early 2022 and led Arm through its public offering. For fiscal 2025, it expects its revenue to rise 18% to 27% as its adjusted earnings per share (EPS) grow 14% to 30%. Those growth rates are healthy, but analysts seemingly expected Arm to raise that guidance in its latest report to reflect the rapid expansion of the AI market.
The better buy: Arm
Arm's stock pulled back because it was priced for perfection, but it still doesn't look cheap at 73 times this year's adjusted earnings. Intel looks a lot cheaper at 20 times forward earnings, but it might deserve that lower valuation.
I wouldn't rush to buy either of these stocks right now. But if I had to pick one, I'd buy Arm because it's growing faster, has better exposure to the AI market, operates a less capital-intensive business, and it isn't struggling with an existential crisis.
