The potential for artificial intelligence (AI) to improve the fortunes of leading businesses has been a huge catalyst for the stock market over the last few years. IDC anticipates spending on AI, including infrastructure and business services, to reach $632 billion by 2028.
AI promises to bring greater efficiency to business operations and labor productivity, but it will require substantial investment in advanced chips to make AI smarter. The following stocks of leading chip companies could offer upside of 39% to 48% based on the average analyst price target.
1. Advanced Micro Devices
Advanced Micro Devices (AMD +0.05%) has played runner-up to Nvidia in the graphics processing unit (GPU) market for many years. But these are the main suppliers of general-purpose GPUs, which have left AMD with a profitable market to fill out on its own. The average price target on Wall Street is currently $148.34, implying upside of 51% over the recent $98 share price.
NASDAQ: AMD
Key Data Points
AMD's revenue grew 14% year over year in 2024, while non-GAAP (adjusted) earnings per share grew 25%. The company has enjoyed strong demand for its Ryzen central processing units (CPUs), in addition to GPUs for data centers. AMD's data center business made up half of its $25.7 billion in total revenue last year.
Still, Wall Street was disappointed that AMD did not provide specific revenue guidance for its data center GPUs in its fourth-quarter earnings report. After offering guidance throughout 2024, analysts took this as a weak signal for near-term sales momentum.
Moreover, AMD's chips made for gaming and other markets are still experiencing weak demand, with revenue down in these segments. It's also not yet clear what impact tariffs might have on the chip industry, but AMD's conservative valuation may already be pricing this risk in.
Concerns over AMD's sales momentum may be overblown, as management cited strong customer interest for its upcoming Instinct MI350 GPUs launching later this year. The stock trades at an attractive forward price-to-earnings (P/E) multiple of 21, which is modest for a growing chip company and could justify the shares climbing back toward Wall Street's price target over the next year or so.
2. Arm Holdings
Arm Holdings (ARM +2.71%) designs chips that are used in virtually every smartphone, cloud computing, and several other markets. After falling 40% off its recent highs, Wall Street analysts are still bullish on the stock's return prospects with an average price target of $158.43, implying 41% upside over the recent $112 share price.
NASDAQ: ARM
Key Data Points
Arm-based processors are in high demand for their low cost and high energy efficiency. With the escalating costs of investing in AI infrastructure, in addition to the increasing power needs of large data centers, Arm is in a strong competitive position.
Arm's revenue grew 19% year over year to $983 million in the most recent quarter. It earns revenue from royalties and licensing fees, which allows the company to convert more than half of its revenue into free cash flow.
More products and devices will become more technologically advanced, especially with AI. This could spell significant growth for Arm, which already has a strong presence in edge computing markets including the Internet of Things, smart home devices, and self-driving car systems.
The only thing that may keep Arm stock from reaching the consensus price target in 2025 is valuation. The stock trades at an ultra-expensive 191 times free cash flow and 148 times earnings. Even using 2026 earnings estimates, the stock still looks fully valued at 55 times forward estimates.
A high valuation is why the stock has remained volatile over the last year despite strong demand for Arm-based processors. Investors could remain flat in 2025 until the company's growth catches up to its high earnings multiple.
