Chipmakers on Opposite Paths: What You Need to Know
Artificial Intelligence Economy
The artificial intelligence economy relies heavily on chipmakers Arm Holdings (NASDAQ: ARM) and Taiwan Semiconductor Manufacturing Company (NYSE: TSM). Despite their critical roles, Wall Street analysts predict these stocks will move in opposite directions over the next 12 months.
Arm Holdings: A Dominant Force
British semiconductor company Arm designs central processing units (CPUs) and compute subsystems, including systems management solutions and software tools that streamline AI application development. Arm licenses its intellectual property to clients, generating revenue through licensing fees and per-device royalties. With over 99% market share in smartphones, Arm is expanding into personal computers and data centers due to its flexible business model.
Recent Financial Performance
Arm reported solid financial results in Q1 fiscal 2025, beating expectations on both top and bottom lines. Revenue rose 39% to $939 million, and non-GAAP net income increased 67% to $0.40 per diluted share. Management maintained its full-year guidance, implying 18% to 27% revenue growth in fiscal 2025.
Valuation Concerns
Despite its strong performance, Arm’s valuation is a concern. With Wall Street forecasting 25% annual earnings growth through fiscal 2026, the current valuation of 110 times adjusted earnings appears expensive. Investors should wait for a better entry point, and shareholders may want to trim large positions.
Taiwan Semiconductor: Industry Leader
Taiwan Semiconductor is the largest semiconductor foundry, with a key advantage in the cost-intensive business of contract chipmaking. This allows the company to outspend peers on R&D, staying at the cutting edge of process technology. With 62% market share in foundry services, Taiwan Semiconductor has won customers like Apple, Nvidia, and Broadcom.
Strong Financial Results
Taiwan Semiconductor reported strong Q3 financial results, with revenue rising 36% to $23.5 billion and earnings jumping 50% to $1.94 per ADR. CEO C.C. Wei cited strong smartphone demand and AI-related demand for its industry-leading 3-nanometer and 5-nanometer technologies.
Ideal Positioning
Taiwan Semiconductor is well-positioned to monetize AI across end markets, from smartphones to data center servers, due to its customer relationships. Wall Street expects earnings to increase at 23% annually through 2025, making the current valuation of 31 times earnings seem reasonable. Long-term investors should consider buying a small position in this semiconductor stock today.
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