Nvidia Challenger in the Making? A Look Into Arm's First Post-IPO Earnings

Ever since reports emerged that Arm Holdings (ARM 1.40%) was rejoining the public markets, the inevitable comparisons to Nvidia (NVDA -0.37%) began. That’s understandable, to a certain extent. After all, both are semiconductor designers and are among the most widely respected and successful in their field. It wasn’t that long ago that Nvidia announced plans to acquire Arm in a deal valued at $40 billion before the deal was quashed by regulators.

Now that Arm’s initial public offering (IPO) is in the rearview mirror, the company has issued its first financial report as a public company. Let’s look at the results while also highlighting a few important similarities and differences between Nvidia and Arm.

A digital AI brain icon positioned over a semiconductor exchanging information.

Image source: Getty Images.

Arm’s solid financial results

For its fiscal 2024 second quarter (ended Sept. 30), Arm generated record quarterly revenue of $806 million, up 28% year over year. The results were fueled by several long-term licensing agreements signed by “industry-leading technology companies.

Unfortunately, a significant increase in operating expenses weighed on the bottom line, resulting in a generally accepted accounting principles (GAAP) net loss of $110 million, compared to a profit of $114 million in the prior-year quarter. At the same time, Arm’s operating cash flow of $227 million soared 199% year over year, while its free cash flow of $169 million jumped 291%.

Other metrics suggested a strong pipeline of future growth. Arm’s remaining performance obligation (RPO) — which includes contractually obligated sales not yet included in revenue — climbed to $2.4 billion, up 38% year over year.

For the coming quarter, Arm is forecasting revenue of roughly $760 million at the midpoint of its guidance, a deceleration compared to the current quarter and below the $768 million expected by analysts.

An apples-to-oranges comparison

To get a sense of how Arm is performing, let’s compare it to Nvidia’s recent results. For its fiscal 2024 second quarter (ended July 30), Nvidia delivered record revenue that jumped 101% to $13.5 billion, while its net income of $6.2 billion surged 843%.

For the coming quarter, Nvidia expects more of the same, forecasting record revenue of $16 billion, up 318% year over year and up 18% sequentially, driven by soaring demand for its AI chips. While Nvidia has the benefit of easy comps resulting from last year’s downturn, the results are remarkable nonetheless.

The apples-to-oranges nature of the comparison is immediately clear. Nvidia generated nearly 17 times the sales Arm did and was ridiculously profitable to boot. The reason for the seeming disparity is the difference in the companies’ business models.

Arm doesn’t actually manufacture chips but creates the designs used to build them. It then licenses the plans and other intellectual property to technology companies to incorporate into their products, collecting royalties and license revenue in the process. As a result, its revenue and earnings tend to be much lower. Nvidia also designs semiconductors but then contracts the manufacturing of these chips to foundries and sells the finished product directly to consumers and businesses. This results in much higher sales and profit metrics.

There’s another important distinction. Nvidia pioneered the modern-day graphics processing unit (GPU) — which has become indispensable for artificial intelligence (AI) and data centers. Arm’s claim to fame is the central processing unit (CPU) that is a staple in roughly 90% of the world’s smartphones. While the market for AI processors is currently growing at a triple-digit pace, the smartphone market is expected to generate steady but unremarkable single-digit growth in coming years.

It’s also worth noting that Nvidia is a customer of Arm. The company’s recently released Grace Hopper H200 AI Superchip is based on Arm’s architecture. So, while Arm is certainly enjoying the fruits of the AI revolution, Nvidia is better positioned to reap the current windfall.

AI is the wild card

In regulatory filings leading up to its IPO, Arm described itself as “the world’s most widely used CPU architecture.” The company also noted that it had shipped 250 billion processors since inception, including 30.6 billion in fiscal 2023. The company said, “We architect, develop, and license high-performance, low-cost, and energy-efficient CPU products.”

Furthermore, Arm mentioned AI dozens of times in the same filing, noting that Arm CPUs were already running AI on “billions of devices, including smartphones, cameras, digital TVs, cars and cloud data centers.” The company’s latest chipset — which can be paired with a GPU in a variety of mobile devices — focuses on the same miserly power efficiency that made it a staple in smartphones. That said, Arm has plenty of competition from the likes of Intel and Advanced Micro Devices, who are both working feverishly on power-efficient CPUs for the AI market.

There’s still an opportunity for Arm to benefit from AI, but it could take years to play out. The potential for AI technology to take up residence on mobile devices, or “on the edge,” could increase demand for Arm’s products in the years to come. For the time being, however, AI is taking up residence in the cloud, which is Nvidia’s domain.

So, is it time to invest in Arm stock? While the company will certainly benefit from the accelerating adoption of AI, it won’t likely ever be a direct challenger to Nvidia. Furthermore, Nvidia and Arm currently have similar valuations, with each selling for roughly 15 times forward sales. I’d much rather spend my hard-earned investing dollars on a company generating strong triple-digit growth than one resigned in the low double-digits. For my money, Nvidia has greater prospects and is, therefore, the better buy.

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