Nvidia and Arm Holdings were the best-performing Nasdaq-100 stocks during the first half of 2024, but Wall Street expects Arm to decline sharply in the coming months.
gave Nasdaq-100 The Nasdaq tracks the 100 largest non-financial companies on the stock exchange. The index is heavily weighted towards the technology sector, and includes some of the world's most innovative companies.
The Nasdaq-100 returned 18 percent through the first half of 2024, driven by excitement about artificial intelligence (AI). Investors showed a particular preference for two AI semiconductor stocks. Nvidia (NVDA -0.36%) And Arm Holdings (ARM -1.99%) led the Nasdaq-100 higher, with shares up 150% and 122%, respectively, during the first half.
Wall Street is less optimistic about its prospects in the second half, especially where Arm is concerned. Nvidia has an average price target of $128 per share, which is 3% above its current price of $124 per share. But Arm's average price target is $120 per share, implying a 28% downside from its current price of $167 per share.
Here's what investors should know.
Nvidia: Market leader in data center GPUs and AI processors
Nvidia designs graphics processing units (GPUs), chips that have become the gold standard for accelerating data center workloads such as artificial intelligence (AI). The company accounted for 92 percent of data center GPU sales last year, and Forrester Research recently wrote, “Nvidia sets the pace for AI infrastructure worldwide. Without Nvidia GPUs, modern AI would not be possible.”
Nvidia has further entrenched its GPUs as the industry standard in AI computing by branching out into other hardware markets. Its networking solutions recently surpassed an annual revenue run rate of $13 billion. And its Grace central processing unit (CPU) — Nvidia's first data center server CPU — is moving toward a multibillion-dollar product line, according to CEO Jensen Huang.
Nvidia also provides subscription software and cloud services that help developers train large language models (LLMs) and other machine learning models (MLMs) and build all kinds of AI applications. This part of its business recently surpassed an annual revenue run rate of $1 billion. According to analysts, Nvidia has an almost unbeatable economic moot in its ability to combine superior hardware with software and services that support AI projects.
Going forward, Wall Street expects Nvidia to grow non-GAAP earnings per share (EPS) by 33% annually through fiscal 2028 (ending January 2028). In this context, the current valuation of 69 times earnings is less expensive. Those numbers give a PEG ratio — price-to-earnings multiples of forecast earnings growth — of 2.1, a substantial discount to the three-year average of 3.1.
I've been an Nvidia shareholder since 2017, and I'm happy with the size of my position. But if my portfolio lacks exposure to Nvidia, I'd be comfortable buying a short position today, despite the muted near-term outlook among Wall Street analysts.
Arm Holdings: Market leader in smartphone and mobile processors
Develops and licenses CPU products and development tools to clients such as Arm. apple, Amazon, and Nvidia. Those companies use Arm technology to design custom chips and systems that address different use cases. For example, Arm Cortex processors are optimized for smartphones and mobile devices, while its Nuverse processors are optimized for artificial intelligence such as cloud computing workloads.
Each processor has an instruction set architecture that defines how the hardware and software interact. Arm architecture has historically been associated with power efficiency, so Arm has a 99% market share in smartphones and over 60% market share in other mobile devices. but is used by the x86 architecture Intel And AMD Historically associated with computational efficiency, those companies dominate the PC and data center markets.
However, while Intel and AMD have failed to gain a foothold in the mobile processor market, Arm has improved the computational performance of its CPUs and gained market share in consumer electronics and cloud computing. For example, Apple M-series chips and Amazon Graviton processors are built on ARM architecture, as are Nvidia Grace CPUs and Nvidia Grace Blackwell Superchips.
Arm reported solid financial results in the fourth quarter of fiscal 2024 (ended March 31), beating guidance on the top and bottom lines. Revenue rose 47% to $928 million, and non-GAAP net income rose to $0.36 per diluted share, up from $0.02 per diluted share in the prior year. But the administration expects the pace to slow. Guidance implies a 22% revenue growth in FY2025.
Going forward, Wall Street expects Arm to grow adjusted EPS at an annualized rate of 23 percent through fiscal 2028 (ending March 2028). This consensus estimate makes its current valuation of 131 times earnings look too expensive. Remember how Nvidia has a PEG ratio of 2.1? Well, the arm's PEG ratio is 5.7.
Arms is an excellent business with tremendous growth potential. Wall Street may or may not be right about Arm's shares falling sharply in the coming months. But I plan to avoid this stock unless it trades at a cheap price.
John Mackey, former CEO of Whole Foods Market, is a member of the board of directors of The Motley Fool, an Amazon subsidiary. Trevor Genuine holds positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Apple and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a Disclosure Policy.