Is Arm the Next Nvidia?

When it comes to artificial intelligence (AI), chipmaker Nvidia (NASDAQ: NVDA) is the reigning champ. The company's focus has evolved in recent years, pivoting from rendering lifelike images in video games to providing the computational horsepower needed to advance AI.

The next generation of the AI revolution is upon us, as agentic AI and robotics promise to consume even more resources as models and systems become increasingly complex and power-hungry. Thus far, Nvidia's graphics processing units (GPUs) have been the gold standard for AI applications, but it's part of a larger equation, and users are looking high and low for solutions to the power consumption problem.

Arm Holdings (NASDAQ: ARM) has been on the cutting edge of chip design for more than 35 years, developing and licensing the designs that underpin a wide range of semiconductors. Just this week, the company announced it will produce physical silicon for the first time in its history.

Image source: The Motley Fool.

CPUs are "central" to the advancement of AI

While GPUs make all the headlines, central processing units (CPUs) are an equally important part of the equation. While GPUs provide the computational horsepower to accelerate AI processing, CPUs still serve as the conductor and brain of the operation, performing sequential tasks such as preparing data and managing the workflow.

Arm's chip designs are already the industry standard for CPUs, but Arm AGI CPU marks the first time the company has ventured into chipmaking, and the impact is already rippling across the tech industry.

The chip was designed with AI in mind. Mohamed Awad, Arm's cloud AI chief, says the Arm AGI CPU is "the first production silicon from Arm, designed for AI infrastructure at scale." The chip is "ruthlessly optimized" for artificial general intelligence (AGI), hence the name.

Awad went on to describe the new processor, and the specifications are impressive. The chip sports 64 CPUs and about 8,700 cores, which provide "two times the performance-per-watt than you can from an x86 rack," Awad said. "That means twice as much performance in the same footprint, in the same power." Arm's architecture is "super-efficient" at a time when the industry is incredibly focused on reducing power consumption, thereby saving energy -- and money.

Management expects revenue from the ARM AGI CPU to ramp significantly, reaching roughly $15 billion by fiscal 2031. For context, Arm's revenue for all of fiscal 2025 was just $4 billion, so the potential is clear. Moreover, for fiscal 2031, management is forecasting total revenue of $25 billion, resulting in earnings per share (EPS) of $9.

Is Arm the Next Nvidia?

This isn't really an apples-to-apples comparison. Nvidia is the leading provider of GPUs for AI data center applications, with an estimated 92% market share. The company's market dominance is reflected in its $4.2 trillion market cap

Arm's situation is a little different. Arm-based processors account for about 40% of the cloud data center market, but many of those chips are produced by others under license from Arm. As such, the company is more of a niche player, and while its contribution is immense, its market cap of $167 billion helps provide perspective.

That said, Wall Street is bullish. Evercore ISI analyst Mark Lipacis maintained his outperform (buy) rating and raised his price target to $227, representing potential upside of 45% from Wednesday's closing price. The analyst said that Arm reminds him of Nvidia, in that the company's CPU designs are already the de facto standard in the industry. He went on to say that CPUs "are having a moment," and that Arm's focus on energy efficiency will align with current market demands.

That's not to say that it will all be smooth sailing. Chip production is a thing unto itself, and Arm will be competing in the market against its legacy customers. Both will be key hurdles for the company to overcome in order for it to thrive.

Finally, Arm stock isn't cheap, selling for 72 times next year's expected earnings. However, the ramp of the AGI CPU in 2028 changes the equation for investors. If the company generates EPS of $9 by fiscal 2031, the stock is selling for just 17 times those expected earnings, which reframes it as a compelling opportunity.

With all this for context, I don't expect Arm Holding to be the next Nvidia. That said, given the company's importance to the future of AI, its growing inroads in the space, and its intriguing opportunity, Arm stock is a buy.

Danny Vena, CPA has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.