Nvidia was one of the global stock market darlings of 2024. This was mostly as a result of being at the forefront of artificial intelligence (AI) for the year. Yet due to the exceptional share price rally (almost 200%) in the stock, some investors are looking for alternative growth stocks that could lead the way next year. Here are two to consider as we get ready to start the year.

More specialist chips

The first one is Broadcom (NASDAQ:AVGO). The US stock enters 2025 on a hot streak already, with the share price up 54% in the past month. This has pushed the gains over the last year to 118%.

It has soared recently as investors try and find options that are viable alternatives to expensive chips from Nvidia. Not only does Broadcom tick this box, but it’s also becoming a frontrunner in custom chips. For example, Nvidia does well with general-purpose graphic processing units (GPUs). Yet Broadcom has expertise in making Application-Specific Integrated Circuits (ASICs), which are more customisable for companies with specific AI needs.

Given that 2025 could see AI become a lot more specific as companies try to carve out a niche to win customers, Broadcom could see demand surge. As a result, I’d expect this to filter down to better financial results. In turn, this should help it to a higher share price.

As a risk, Broadcom is trying to expand out of just hardware sales. This was noted with the recent purchase of VMware. However, I think the business needs to focus on what it’s good at, with other operations potentially becoming a distraction.

Armed and ready

A second option is Arm Holdings (NASDAQ:ARM). Over the past year, the stock is up 87%. The company is renowned for processor designs that are widely used in mobile devices. Yet the business is now pushing hard into AI and machine learning.

The latest quarterly results highlighted that with the industry buying more chips and needing more complexity in the chips, the result will be higher demand for Arm products. As the report noted: “The concept of AI everywhere is increasing demand for Arm’s highly performant and energy-efficient compute platform.”

Looking forward to next year, the continued development of specialised processors could challenge the dominance of Nvidia in certain applications. This would be in a similar way to what Broadcom could do.

However, investors need to be cautious due to the ongoing legal battle with competitor Qualcomm. This centres around the intellectual property licensing agreements that Qualcomm obtained through acquisitions in recent years and that Arm disputes.

Both AI growth stocks could do well next year and I feel investors could carefully consider both if they are looking to add exposure to this area.

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A full-blown market crash is pretty rare, with only a handful occurring in the past century. Corrections are far more common, typically occurring every few years. Stock exchanges around the world have experienced several corrections since the 21st century began.

It’s impossible to predict exactly when a correction will happen. It seems logical to assume one might occur after a long period of consistent growth. But as the adage goes: “The market can stay irrational longer than you can stay solvent“. 

In other words, there is no guaranteed way to predict a market’s moves and many have gone broke trying. But history has shown that in most cases, corrections are temporary. So rather than something to fear, they should be viewed as an opportunity.

Keeping cash aside

I have a fair amount of cash put aside in an easily accessible savings account. It only returns around 5% on average per year but it’s stable and reliable. I could dump all this cash into whatever tech stocks are trending this month but if things go south, that money is tied up — unless I sell at a loss.

I prefer to have it on hand for when an unexpected market correction serves up a wealth of good investment opportunities. If I don’t, I could miss out.

Making good choices

It can be a bit daunting choosing to invest during a market correction. Nothing really looks like a good option when prices are all falling. Which stocks should I choose? How can I know when the prices will stop falling?

Unfortunately, there’s no guaranteed one-size-fits-all solution. But some preparation can help. Having a good idea of what stocks you’re interested in beforehand is a good start. That way, I can hone it down to four or five and decide from there.

Here’s one stock on my wishlist that I’m ready to buy when the market corrects.

ARM Holdings

Although listed in the US, ARM Holdings (NASDAQ: ARM) is a British semiconductor and software design company. It capitalised heavily on the AI boom — and did spectacularly well. 

The share price is already up 150% since its IPO less than a year ago. That’s almost identical to the parabolic growth of Nvidia. Not surprising, considering the semiconductor giant is one of ARM’s biggest customers.

There’s no denying it’s done well since going public. But that may all change soon. Profit margins this year are already down to 9% from 19%. And with earnings only a fraction of the market cap, some analysts are calling the stock “grossly overvalued”.

I think I might get my cheap buying opportunity soon. One analyst has set a 12-month price target of $66 per share on the stock — a 52% decline from current levels. 

ARM is set to report its fiscal first-quarter earnings in a few days, on 31 July. Once those results are posted, I’ll have a better idea of where the stock is headed.

Until then, I’ll be ready and waiting.

The post My portfolio is ready for a 2024 stock market correction appeared first on The Motley Fool UK.

This is a fantastic run, of course. But is it warranted? I’m not so sure.

Background

The British-based semiconductor company’s focused on developing and designing computer processing units (CPUs).

It’s also very successful. Its architecture is used by 99% of smartphones around the world. Furthermore, companies such as Nvidia use ARM Holdings’ architecture to make data processing units (DPUs). These are a new class of programmable processors used to improve the performance of artificial intelligence (AI) applications.

Looking at its recent quarterly results, we can also see the business is growing extremely well. Revenue has climbed 47% year on year to hit $928m. Meanwhile, net income has skyrocketed 7,637% to reach $221m.

Valuation concerns

Now I’m not disputing that ARM Holdings isn’t a great company, because its market dominance and results prove it is.

But in my eyes, it’s just way too overvalued.

For context, the company has a market-cap of $168bn. However, it’s trailing 12-month revenue’s only $3.2bn. This gives it a ridiculously high price-to-sales (P/S) ratio of 51.8. Moreover, its trailing 12-month earnings are only $306m, so its price-to-earnings (P/E) ratio’s 552.8. I don’t even know how to describe how big that is, if I’m being honest.

The recent run-up in its share price to produce these insane valuations is likely to do with the hype around AI.

Many companies in the space have seen their demand soar because of this. Just look at Nvidia, which has seen its quarterly revenue increase by 262% year on year, with net income also rising 628%.

However, I think ARM Holdings’ involvement in AI is a tad overstated. It acts more as a supplier to companies that use AI, as opposed to providing any AI functions itself.

Furthermore, even if it were to be treated as an AI stock, I still believe its valuation is a gross exaggeration of what it should be.

If we look at Nvidia again, we can see that it’s growing at a far quicker rate than ARM. Yet, its P/S and P/E ratios are only 39.6 and 74.1 respectively. This is still far below the level ARM’s trading at. Even then, many see Nvidia’s stock price as rather frothy.

Now what?

To make Nvidia’s stock look cheap is some feat. But it’s not necessarily a good one. The company’s growing at a far inferior rate, yet it’s far more expensive as far as valuation metrics are concerned.

Even with a high growth rate, I think it’ll take some time to grow into its current valuation. If I were to create a position in the stock, I’d wait for the price to drop.

That’s why I’ll be steering well clear of ARM Holdings’ stock for the time being.

The post This overvalued growth stock makes Nvidia look cheap! appeared first on The Motley Fool UK.

This British company’s products like its v9 architecture have positioned it at the heart of the artificial intelligence revolution. With the hype around AI becoming very intense, ARM shares leapt from $48 last October to $149 this February. 

After tripling in just a few months, the shares have cooled off. Are they now an attractive buy? I think there are three ways this could go.

The bubble pops

First, let’s address the bear case. The AI bubble pops. Valuations of stocks like ARM, Nvidia or Palantir come back down to earth. ARM in particular would be hurt with a forward price-to-earnings ratio (P/E) of 91 that might fall to the average of the ‘Magnificent 7’ of around 30.

We’ll need to pair this with earnings to get a hypothetical price. Analysts think earnings per share (EPS) will rise at 27% over the next year. If the AI impact slows, then I’ll assume earnings from ARM’s chip designs will still rise, but more slowly too. Let’s go with a 15% increase in EPS. 

All things being equal, the shares would be valued at $38 at the end of the fiscal year. Such a big drop highlights the risks of investing in high P/E stocks. Simply, there isn’t much margin of safety. 

AI resilient

Next, let’s look at how things might go if AI progresses at a smooth rate. In this case, I’d expect earnings projections to be met as the demand for chips worldwide continues. 

I’ll also assume ARM retains its forward P/E of 91. 

In this case, the shares could be valued at $169. That’s a 27% increase on the current share price which sounds pretty good but keeping such a high valuation is a pretty tough task.

The tech hits the mainstream

Now, let’s focus on the upbeat angle. In this scenario, AI hits the mainstream. Practical applications have been found using ARM-related designs and maybe even a new AI breakthrough has been discovered.

In this case, ARM beats earnings much like it did in the last two quarterly results. I could even assume the rapid pace of AI adoption pushes the forward P/E up to 100.

By my (admittedly quite rough) calculation, ARM shares could be valued at $256 at the end of the fiscal year. So even in these outrageously ideal conditions, the shares aren’t likely to triple again.

The modest return from even a very optimistic scenario paints a clear picture — AI stocks have massive amounts of future growth already priced in. With a lack of mainstream applications, particularly those people pay a lot of money for, share prices seem toppy to me.

My opinion on ARM? I love the company, but I can’t get on board with the valuation. I won’t be buying the shares.

The post Will the ARM share price triple again? appeared first on The Motley Fool UK.

So, what’s behind this explosive move? And should I scramble to buy the chip stock for my portfolio or wait for a better opportunity?

Q3 results boosted by AI

The reason the share price spiked was that results for the third quarter of fiscal 2024 were much better than expected.

For the quarter, revenue came in at $824m (+14% year on year) versus $761m expected. Meanwhile, adjusted earnings per share (EPS) came in at 29 cents (+32%), well above the consensus forecast of 25 cents.

We had an outstanding Q3 delivering record revenues and exceeding the high end of our guidance ranges for both revenue and non-GAAP EPS.

Arm Holdings Q3 letter

Forward guidance was also very strong. For the current quarter, Arm said it expects EPS of between 28 cents and 32 cents on sales of $850m to $900m. Going into the print, analysts had been expecting earnings of 21 cents per share on sales of $780m.

Meanwhile, for the full fiscal year ending 31 March 2024, Arm expects to generate revenue of between $3.16bn and $3.21bn along with adjusted earnings of $1.20 to $1.24 per share. Analysts had been expecting $3.05bn and $1.07 per share.

It’s worth pointing out that Arm’s growth is being driven by new artificial intelligence (AI) products and applications. As customers like Nvidia aim to design new chips for AI work, the company is generating higher royalties.

“We’re seeing more interest in newer designs and newer technologies by customers due to interest in AI,” CFO Jason Child told Reuters. “It’s real. Folks are actually buying and licensing that technology,” he added.

Should I buy now?

When I covered Arm after its Initial Public Offering (IPO) last year, I said that there was a lot to like about the company.

And today, my view is the same. I think it has a huge amount of potential in our increasingly digital world.

It is impossible to build an intelligent electronic device without a CPU, and more chips with Arm CPUs have been delivered in the last decade than any alternative.

Arm Holdings Q3 letter

Given the growth potential, I would like to own the stock one day.

However, at present, I can’t justify the valuation here.

In the pre-market, Arm shares are trading at $93. So, that puts the forward-looking price-to-earnings (P/E) ratio at 76 if we take the mid-point of the EPS guidance ($1.22)

That’s really high for a chip stock. And it adds a lot of risk to the investment case. For reference, Nvidia (which is quite expensive itself) has a P/E ratio of 33.

Ultimately, I think there are better chip stocks to buy for my portfolio right now. Some examples include Lam Research, Applied Materials, and KLA Corp.

These companies – which specialise in chip manufacturing equipment – are likely to benefit from the growth of AI too. However, they all have P/E ratios of less than 30. So, I see them as more attractive from a risk/reward perspective.

The post The Arm share price is rocketing! Should I scramble to buy the stock or wait? appeared first on The Motley Fool UK.

If the Cambridge-based chip designer was listed in the UK, it would trade at one of the highest valuations on the London Stock Exchange.

Instead, ARM is listed on the other side of the Atlantic where stocks cost more. A lot more, in fact.  The S&P 500 average price-to-earnings (P/E) ratio is a whisker below 25 but some distance above the FTSE 100 at just 11. 

Yet even taking into account bigger American valuations, ARM still looks like its eye-wateringly pricey. It trades at over 150 times earnings and over 60 times forward earnings. 

Comparisons

It’s hard not to compare ARM to Nvidia (NASDAQ: NVDA). Nvidia is also in the electronic chips business and also flirts with triple-digit P/E ratios. Most importantly, Nvidia has been a terrific buy – up 14 times over the last five years despite seemingly crazy valuations.

There are two questions I’m interested in here. First, why are ARM shares so expensive? And second, could the firm enjoy Nvidia-like growth over the next few years? 

To circle back to Nvidia, the US giant’s growth has been driven by artificial intelligence (AI). Or rather, the prospect of a world where AI is at the heart of everything we do. 

Its share price surged thanks to investors wanting to get in on the ground floor of this technological revolution. 

Stolen a march

Nvidia has stolen a march on its competition. The firm’s $10,000 A100 microprocessor is used in 95% of current AI applications. Each time we type a question into Chat-GPT, chances are Nvidia’s GPUs are doing the grunt work. 

But Nvidia and ARM aren’t competitors. Without wanting to get too technical, the former’s focus is on making chips whereas ARM designs the architecture some chips are created with.  

In fact, Nvidia’s new GH200 Grace Hopper Superchip is based on ARM architecture and the US firm even bought a sizable stake in ARM at the IPO.

And while ARM has other routes to increasing earnings – notably a plan to bump up licensing fees on the use of its smartphone architecture – the expensive valuation comes, like Nvidia, with the prospect of an AI revolution. 

This is the core issue. If AI changes the world then 150 P/E ARM might look like a cheap buy. If the technology is a damp squib then weak profits would make the stock look even more expensive than it does now.

Unexplored territory

We’re in unexplored territory here, but my own view is cynical. AI applications might look exciting at first glance. I mean, who doesn’t want to ask a robot a question? Or create a picture out of thin air? 

But I haven’t seen any groundbreaking applications yet. It feels like we’re in an evolutionary phase rather than a revolutionary one with this technology.

I don’t doubt AI will improve or that one day machine learning will produce amazing things. But I’m investing for the next 10 or 20 years, not for another 100. I’ll keep ARM on my watchlist for now.

The post Why are ARM shares so expensive? appeared first on The Motley Fool UK.

Background

Considered the biggest IPO of the year, shares of ARM Holdings began trading on the Nasdaq stock exchange on 14 September.

The company has also previously traded publicly, before being acquired by SoftBank in 2016.

There was a lot of hype around the share offering, with many seeing huge potential going forward. Just ask Nvidia, one of the largest companies in the world. It tried to buy Arm Holdings last year, but ultimately failed due to regulatory issues.

Valuation

Upon the IPO, Arm Holdings was initially valued at over $60bn. It has since pulled back closer to $54bn.

Even after this fall in market capitalisation, this is pretty lofty for a company with only $2.66bn of revenue and $404m of profit in the past 12 months.

For me, this is too expensive, especially when I take into account the year-on-year growth it has experienced over the same period. Revenue and earnings declined by 2.5% and 53.3% respectively.

Its prospects in AI

Traditionally, this British chipmaker is focused on developing and designing computer processing units (CPUs).

It is very successful in this field. So much so, that you will find its architecture in 99% of smartphones around the world. This makes Arm Holdings a very important company.

It’s not just focused on smartphones though. It has a strong foothold in the automotive sector with a 41% market share.

However, a lot of the optimism around Arm Holdings comes from its prospects in the world of AI, as opposed to its established business.

This arises from the expectation of rapid growth in cloud computing. Companies such as Nvidia employ Arm Holdings architecture to make data processing units (DPUs). DPUs are described as a new class of programmable processor that improves the performance of applications for AI and machine learning.

Scepticism

After researching Arm Holdings though, I don’t believe it’s as involved in the AI world as it’s made out to be. It’s more involved as a supplier to other companies in the AI space.

It seems like prominent tech investor, Cathie Wood, agrees with me. She stated on CNBC’s Squawk Box Europe that there “might be a little bit too much emphasis on AI” with respect to Arm Holdings.

As a result of the misunderstood role it plays in the AI world, I believe it’s valued sky-high like Nvidia. However, Arm Holdings isn’t experiencing the same level of growth.

In fact, if you look at overall revenue, growth has flatlined.

Therefore, I am planning on staying far away from Arm Holdings shares for the time being.

The post Are Arm Holdings shares an opportunity to join the AI rally? appeared first on The Motley Fool UK.

The tech firm is a British success story. It was founded in Cambridge in 1990 and has now become one of the world’s most important companies. Its designs are crucial to making electronics around the world run, including almost all smartphones.

It’s so vital, in fact, that huge names like Apple, Alphabet, Samsung, and Nvidia all invested in Arm last week. And with the shares on the market again, I have the chance to buy in too. So, what am I saying? This is a no-brainer buy, isn’t it?

Well, the first thing to point out is that this stock has nothing to do with the London Stock Exchange. The firm, still based in Cambridge, chose a US listing to attract a higher valuation. And in fairness, it’s hard to argue with the result. 

A huge valuation

Arm shares went public last Thursday at $51 before shooting up to $64 by close of play. The demand was high – understandable for such a great company – but the price doesn’t make much sense to me.

The firm had an earnings-per-share of $0.39 last year, a tiny figure compared to the $64 share price. On those numbers, Arm trades at over 100 times earnings. That’s a crazy valuation. 

If Arm attracted the same price while listed in the UK, it would comfortably find a home on the FTSE 100. Its market value of $60bn would even see it sneak into the top 10. Its P/E would be the highest on the index and by some distance too. 

Nvidia is an obvious comparison here. The US chip designer also has a P/E of over 100. The difference is Nvidia is growing revenue and income, whereas Arm isn’t. Arm’s net income actually declined last year. How can you justify a P/E over 100 with declining profits? I don’t think you can. 

A reason the price could be so high, and a cause for further concern, is the low supply of Arm shares. The float is only 9% of all the shares outstanding. With such a small number of shares available, I’d expect high volatility. 

We’ve seen this already with a 25% leap last week. Then, in yesterday’s trading, the stock dropped 16%. These ups and downs make the stock a risky buy, and with so few shares on the market, I expect more erratic moves over the coming weeks.

To make things worse, a small float can create a squeeze in price even from low demand. That could push the share price up in the short term, but lead to a crashing price if and when SoftBank – Arm’s owner – chooses to sell more of its stake. 

A buy?

The fundamentals just don’t add up for me here and I can’t see how the share price is justified. And that really is the rub. As much as I’d like to own the shares of such a great British enterprise, I won’t be buying at the current price.

The post Down 16%, are Arm Holdings shares a no-brainer buy? appeared first on The Motley Fool UK.

Background

SoftBank’s acquisition of Arm Holdings in September 2016 for approximately $32bn aimed to position the investment giant as a major player in the technology and semiconductor industry.

The acquisition allowed it to leverage Arm’s expertise in microprocessor design and semiconductor intellectual property (IP), which are integral to various bits of tech, including smartphones and IoT devices.

Arm primarily makes money by licensing its semiconductor and IP technology to various companies in the tech industry.

It earns revenue through licensing fees and royalties paid by manufacturers that use Arm’s tech to design and produce semiconductor chips for a wide range of devices, including smartphones, tablets, IoT devices, and more.

Valuation

Reports suggest that the Arm IPO was oversubscribed by 10 times, so no surprise that there was immediate upward pressure on the share price.

However, at Friday’s closing price, the fabless semiconductor company looks very expensive. Arm trades with a price-to-sales ratio of 23 times. Normally, a price-to-sales ratio above 10 is considered high.

When we look at the forward P/S ratio, Arm appears to be trading in line with industry darling Nvidia — around 20 times. Meanwhile, figures suggest Arm is trading around 150 times earnings.

Investment prospects

Since SoftBank’s acquisition of it, Arm has increased sales by over 70%, riding the wave of global smartphone adoption. In 2016, just less than half the global population had a smartphone. Today that figure is 85%.

For cautious investors, Arm offers the chance to invest in a well-established semiconductor designer known for its profitability and growth over the past decade.

While the smartphone market might be reaching maturity, Arm holds 99% of the market, longer-term investors may hope to see the firm build market share in high-growth segments like artificial intelligence (AI). This is projected to grow at a 37% CAGR through to 2031.

Moreover, there’s room for growth in the automotive sector where it holds a 41% market share. The connected car segment is expected to grow at a 15.7% CAGR through 2027.

Little room for error

Arm’s valuation leaves little room for error though. Firstly, this is particularly concerning given that sales and profits actually declined over the past year.

Investors may also be concerned about tough competition across various sectors. Companies like Qualcomm offer cost-effective, open-source RISC-V architecture. Potentially, this could erode Arm’s position in the smartphone and IoT market.

Equally, investors should consider the impact of trade restrictions. Arm is prohibited from selling high-margin products like the Neoverse V-series CPU IP in China.

My view

While it’s an exciting company with a commanding share of the smartphone market, it may not be the most exciting investment opportunity, I feel. It’s phenomenally expensive, and lacks the clear growth trajectory of Nvidia.

The post Is the premium Arm share price warranted? appeared first on The Motley Fool UK.