Arm and Qualcomm Lead Mobile Chip Design. 1 Stock Is the Better Buy.

The share prices of two mobile industry chip designers, Qualcomm (NASDAQ: QCOM) and Arm Holdings (NASDAQ: ARM), plummeted after they reported their quarterly earnings on Wednesday, Nov. 4.

Qualcomm stock was down roughly 14% after missing earnings estimates, while Arm stock also fell 14% on a weaker-than-hoped outlook. The lukewarm results happened to come out on a day when there was a massive post-election sell-off, with the Nasdaq Composite down roughly 1,000 points on Nov. 5, or about 4%.

Is this a buying opportunity for either mobile chip provider?

Image source: Getty Images.

Arm stock has been a juggernaut

Qualcomm and Arm are market leaders in the industry, but they occupy different niches within the space. Qualcomm designs chips that are used in mobile phones and holds a market share of about 23%. It is second only to Taiwanese company MediaTek, which has a 31% share.

Arm designs the blueprints or architecture for mobile phone chips, which it licenses to companies like Qualcomm and Apple (NASDAQ: AAPL) that use the blueprints to design their chips. Arm has a massive 99% market share in mobile phone chip architecture. That moat is protected by the fact that Arm owns the intellectual property rights to the computer language and instructions that the chips use to run the mobile software. Competitors cannot build their own architecture to run apps without the language that Arm controls.

There has been a lot of legal back-and-forth between Qualcomm and Arm, with Arm suing Qualcomm in 2022 for trademark infringement over alleged use of its designs. Qualcomm then sued Arm in 2024 for violating its agreements by withholding support, among other charges. Last month, a jury voted in favor of Qualcomm with nominal damages awarded.

Since it went public in September 2023, Arm, based in the U.K., has been a juggernaut, fueled by its market dominance. It has posted an average annualized return of 47% over the past three years. Qualcomm has averaged a 9% return over the past three years.

The two stocks have been moving in different directions this year, with Arm stock up 55% year-to-date and Qualcomm stock down 8%. Will the latest earnings change the trajectory for one or the other?

Qualcomm stock is cheaper

Arm posted record revenue of $1.44 billion in its fiscal second quarter, which was up 27% year over year. Its licensing revenue jumped 50% to $773 million, while royalty revenue increased 8% to $670 million.

Adjusted net income was $566 million, or $0.52 per share, up from $0.39 in the same period a year ago. Both revenue and earnings beat analysts' consensus estimates.

For its Q3, Arm projects $1.54 billion in revenue and adjusted earnings of $0.56 per share. This beat consensus estimates of $1.53 billion in revenue and $0.55 per share in earnings. Shares were down on the slower, single-digit growth in royalty revenue and an outlook that perhaps didn't beat estimates by enough to satisfy its high P/E ratio of 220.

Qualcomm saw revenue decline 8% in the quarter to $10.44 billion, but that was higher than estimates of $10.12 billion. Adjusted earnings were down 28% year over year to $2.17 per share, which slightly beat estimates of $2.16 per share.

In its guidance for the current quarter, Qualcomm estimates revenue of $10.4 billion to $11.2 billion, which is higher at the midpoint than estimates of $10.48 billion. However, earnings are targeted at $2.15 and $2.35, which would be below consensus estimates of $2.27 per share.

Are either of these stocks a buy?

Of the two, Arm is in a much better position to grow long-term due to its dominance in the moblie industry, but also its growth in other markets, namely in AI data center chip design. But it is just way too expensive right now to consider.

Qualcomm is much cheaper, trading at 19 times earnings, but it faces headwinds with rising supply costs and that's putting a squeeze on earnings.

I wouldn't buy either right now, but you may want to revisit Arm stock after this sell-off to see if it settles at a more reasonable valuation.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Arm Holdings, and Qualcomm. The Motley Fool has a disclosure policy.