The semiconductor sector is a great market for investors thanks to its strong growth opportunities. Computer chips are increasingly in demand in a wide range of industries, such as robotics, automotive, and artificial intelligence.
Two prominent semiconductor companies to consider investing in now are Advanced Micro Devices (AMD +1.64%) and Arm Holdings (ARM +0.41%). AMD produces hardware that makes AI systems possible. Arm is known for its chip designs, particularly for smartphones, where it holds an estimated 99% market share.
Both companies offer reasons to invest, but if you had to choose between them, which comes out on top? Here's a breakdown of AMD and Arm to help determine the better investment for the long haul.
Reasons to consider AMD stock
AMD is an appealing investment because its products enable an advanced computer architecture called accelerated computing. This approach uses dedicated hardware to speed up data processing. AI systems crunch through a deluge of data, making accelerated computing a necessity.
NASDAQ: AMD
Key Data Points
Once AI took off, AMD experienced massive sales gains. In 2024's fourth quarter, the company's sales to data centers ballooned 69% year over year to $3.9 billion. Data centers house AI systems, so this part of AMD's business was key to the company's total Q4 revenue growing 24% to $7.7 billion.
Data center customers aren't the only ones hungry for AMD's hardware. The company also saw strong demand from the PC market as AI expands beyond the cloud to personal devices. This part of AMD's business achieved 58% year-over-year growth in Q4 revenue to a record $2.3 billion.
AMD's sales success led to excellent financials. For instance, its Q4 gross margin increased to 51%, compared to 47% in the prior year. This indicates improved cost management and profitability in its business.
AMD's Q4 balance sheet boasted total assets of $69.2 billion compared to total liabilities of $11.7 billion. Its assets included $5.1 billion in cash, cash equivalents, and investments, a 13% improvement from the third quarter.
The case for Arm Holdings stock
Arm Holdings dominates the market for smartphone semiconductor chips because its designs are energy-efficient. Now, the company is using its mobile device strengths to capture a share of the lucrative AI market. This is a smart move because AI tech consumes tremendous amounts of power.
NASDAQ: ARM
Key Data Points
Last year, Arm introduced a new integrated circuit to support the use of AI for consumer devices, which it calls the Arm compute subsystems (CSS) for clients. This product uses three-nanometer process technology, which shrinks circuitry down to about the size of human DNA, This allows more components to fit on a chip, and makes the device more powerful.
According to Arm's management, CSS demand has been strong, resulting in record royalty revenue of $580 million -- a 23% year-over-year increase -- in its fiscal Q3, ended Dec. 31, 2024. This contributed to the company's 19% year-over-year growth in total Q3 sales to $983 million.
Along with growing revenue, Arm's financials are strong. Its fiscal Q3 gross margin was an impressive 97.2%, an increase from the prior year's 95.6%. The company's Q3 balance sheet included total assets of $8.5 billion, with cash and equivalents of $2 billion. That cash pile alone nearly exceeded total liabilities of $2.1 billion.
Arm generates income by licensing its chip designs and collecting royalties, but it may be expanding into other revenue streams. According to recent news reports, Arm is producing the actual hardware its designs facilitate, and has secured Facebook parent Meta Platforms as a customer.
Meta would be a key customer since the social media giant is building a data center the size of a city. If the news reports are correct, this move would put Arm in direct competition with AMD, which currently provides hardware to Meta.
Deciding between AMD and Arm stock
Given AMD's and Arm's success with their AI businesses, both are worthwhile semiconductor companies to invest in. But in choosing between the two, a key factor to consider is stock valuation.
To assess this, let's look at each company's forward price-to-earnings (P/E) ratio. This metric tells you how much investors are willing to pay for a dollar's worth of earnings based on estimates for the next 12 months. Arm's forward P/E ratio is substantially higher than AMD's at the time of writing. This suggests that AMD stock is the better value.
Data by YCharts.
AMD's forward P/E multiple has dropped in 2025 as its stock price declined. Its shares fell due to a combination of factors. AMD's valuation was high, so its stock was due for a correction. Then in January, Wall Street's optimism toward American AI companies was shaken after Chinese start-up DeepSeek unveiled a low-cost AI product. Lastly, while AMD's Q4 results were excellent, they didn't meet Wall Street's elevated expectations.
Now, AMD's share price is looking more reasonable while Arm stock is looking expensive. While both have strong businesses with future growth potential, because AMD stock is the better value, it's the more attractive investment for the long term.
