Semiconductor giants Arm Holdings (ARM) and Nvidia (NVDA) have been two of the hottest tech stocks of the past year. Shares of ARM Holdings have more than tripled, with the stock up an incredible 228% over the last 12 months. It’s hard to beat that type of performance, but Nvidia has done it with a 243% gain over the same time period.
Don't Miss out on Research Tools:
- Discover the latest stocks recommended by top Wall Street analysts, all in one place with Analyst Top Stocks
- Make smarter investments with weekly expert stock picks from the Smart Investor Newsletter
Which of these two red-hot large-cap semiconductor stocks looks like the better investment opportunity? As we’ll discuss in this article, there is a clear winner based on valuation and analyst sentiment.
Nvidia’s Valuation: Elevated but Justified
While these are both popular, AI-related semiconductor stocks, there is a major difference between them when it comes to valuation. Nvidia trades for a fairly rich 49.8 times January 2025 consensus earnings estimates. However, consensus analyst estimates call for it to grow earnings per share (EPS) to $4.03 for the year ending in January 2026, a significant 41.9% increase from the $2.84 it is projected to earn in the Fiscal year ending in January 2025. Based on these estimates, the stock trades at a still elevated but more reasonable 35.1 times forward earnings.
While this is more expensive than the broader market (the S&P 500 (SPX) currently trades for 25 times earnings), you can at least make the case that you are getting into the same ballpark and that this is a reasonable valuation for arguably the world’s most cutting-edge company, not to mention one that is expected to grow earnings by over 40% in the year ahead; phenomenal growth for a mega-cap company with Nvidia’s size and scale.
Arm’s Valuation: Entering the Stratosphere
While Nvidia’s valuation is on the high side but reasonable given its growth, it’s hard to say the same about Arm Holdings, which trades at a significantly steeper valuation. Shares of ARM trade at an incredible 92.2 times consensus March 2025 earnings estimates, nearly double Nvidia’s valuation and nearly four times the level of the average stock in the benchmark S&P 500 index.
Like Nvidia, ARM’s valuation multiple comes down a bit when looking ahead to fiscal 2026, but even then, the stock still trades for 70.2 times consensus earnings estimates, which is still more than double Nvidia’s 2026 price-to-earnings (P/E) multiple. To put it simply, it’s just hard for a stock to sustain that type of valuation over a long period of time, unless it is going to post phenomenal growth numbers in perpetuity, which is extremely rare.
Analysts project ARM stock will grow earnings from $1.56 for the year ending in March 2025 to $2.05 for fiscal 2026. While this projected earnings growth of 32% is impressive, it’s hard to argue that Arm’s shares should be trading at a valuation that is nearly double that of Nvidia when Nvidia’s projected earnings growth is higher at 41.9%.
Other Important Metrics
It’s not just price-to-earnings that Nvidia wins on. While Nvidia’s price-to-sales ratio of 34.5 is high, Arm comes in at an even higher 45.9 times sales. It’s also worth comparing the two chip stocks based based on their PEG ratios (price-to-earnings-to-growth ratio). This is a useful metric for analyzing high-growth stocks like these because it accounts for their earnings growth when evaluating them.
This simple ratio is determined by taking a stock’s price-to-earnings ratio and dividing it by its earnings growth rate. A lower PEG ratio is considered to be more attractive, and investors who favor this metric ideally like to see a PEG ratio of 1.0 or lower.
Nvidia’s PEG ratio of 1.9 is slightly higher than you normally like to see, but reasonable. However, Arm’s astronomical PEG ratio of over 14 indicates that the stock is probably significantly overvalued even when taking its impressive earnings growth into account.
Is ARM Stock a Buy?
Turning to Wall Street, Arm earns a Moderate Buy consensus rating based on 14 Buy, four Hold, and one Sell rating assigned in the past three months. The average ARM stock price target of $141.77 implies 6.7% downside risk from current levels.
Read more analyst ratings on ARM stock
Is NVDA Stock a Buy?
Nvidia stock has a Strong Buy consensus rating based on 39 Buy, three Hold, and zero Sell ratings assigned in the past three months. The average NVDA price target of $153.86 implies 9.1% upside potential from current levels.
Read more analyst ratings on NVDA stock
The Clear Winner: NVDA Stock
While these semiconductor stocks have been two of the market’s best performers, there’s really no contest here. While Nvidia’s valuation is on the high side, it is significantly cheaper than ARM stock, despite the fact that it is projected to grow earnings at a faster rate. Plus, sell-side analysts see Nvidia as having significantly more potential upside than Arm over the next 12 months, and rate Nvidia a Strong Buy, while Arm Holdings is only a Moderate Buy. Nvidia is the clear winner in this comparison of top chip stocks.
