There's a lot of optimism on the long-term prospects of leading semiconductor makers. Big tech companies investing in artificial intelligence (AI) are requiring constant innovation in chip performance to make large language models and AI assistants smarter. Demand for AI chips will only continue to grow, as companies develop fully autonomous cars and build humanoid robots that can work 24/7 in factories.
Now, tariffs and concerns over the economy are clouding the near-term outlook for the chip industry. But this could also present a great opportunity to buy some of these leading chip stocks at cheaper valuations that set up great returns down the road.
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Wall Street is currently bullish on Advanced Micro Devices (NASDAQ: AMD) and Arm Holdings (NASDAQ: ARM). The average price target on Wall Street is at least 48% above their current share prices. Let's review why these companies are positioned for growth, and whether it makes sense to buy them now.
Advanced Micro Devices stock has fallen 44% over the past year, but Wall Street analysts generally remain upbeat about the company's prospects to meet growing demand for AI workloads in the data center market. The consensus rating on the stock is a "buy," with an average price target that is 51% above AMD's current $90 share price.
AMD delivered solid growth in 2024, with revenue up 14% year over year. Its push into the AI chip market with its MI300 series graphics processing units (GPUs) generated $5 billion of data center AI revenue last year. AMD expects this figure to grow into the tens of billions in the coming years.
The chipmaker also continues to show strength in central processing units (CPUs) across the consumer PC and enterprise server markets. "We successfully established our multibillion-dollar data center AI franchise, launched a broad set of leadership products, and gained significant server and PC market share," CEO Lisa Su said during the Q4 earnings call.The consensus analyst estimate projects AMD's revenue to increase 23% this year, according to Yahoo! Finance.
So why is the stock down? There are growing expectations for Intel to mount a comeback in the CPU market. Moreover, AMD didn't provide specific revenue guidance for its data center business on the Q4 earnings call, as it did last year, which is causing some analysts to question the strength of AMD's data center momentum.
Indeed, AMD is well behind Nvidia in GPUs, with the latter controlling an estimated 80% to 90% of the GPU market. But AMD can fill an important need by providing more affordable alternatives to Nvidia's costly chips. Holding even just a small share of a $1 trillion data center opportunity is not a bad place to be, especially considering AMD's low valuation.
Overall, I would side with the consensus view of the stock as a buy. The stock's forward price-to-earnings multiple of 19 is already pricing in the possibility of lower earnings this year. This could make AMD shares a bargain buy if it can continue to deliver double-digit annual earnings growth over the long term, as analysts expect.
Arm Holdings' energy-efficient, high-performance chip designs have fueled a lot of enthusiasm for its growth prospects. The consensus Wall Street price target is 48% above the current $100 share price. But is this the best time to buy it?
Arm doesn't manufacture chips. It has a lucrative business model that focuses on designing chips and then licensing those designs for other companies to use in their products, including Apple and Nvidia. Arm-based chips are increasingly showing up across several markets -- everything from data centers to consumer electronics.
Arm's revenue grew 19% year over year in fiscal 2025's third quarter. Its chips are in virtually every smartphone, but it is rapidly gaining share in the cloud computing market. Amazon, Microsoft, and Alphabet's Google are using Arm-based chips to power their cloud computing services.
The stock is down over concerns about a slowdown in the chip industry this year. Arm is exposed to smartphone demand, where lower consumer spending could weigh on its near-term revenue prospects. While it is already trading at a steep discount from its recent highs, the shares still trade at a high valuation that may limit upside if the economy sinks into a recession.
Valuation is always an important part of evaluating a stock's long-term return potential. Analysts expect Arm's earnings to grow at an annualized rate of 31% in the coming years, which could lead to substantial returns. But investors are already pricing in a lot of growth, with the stock trading at 50 times this year's expected earnings. This valuation simply doesn't compare favorably to AMD and Nvidia, which offer similar growth potential at a much lower valuation.
Arm is relatively overvalued to other chip stocks right now. Arm is the better business than AMD due to its royalty-based business model, high margins, and strong relationships with top tech companies. But AMD's lower valuation could lead to superior returns as the industry recovers.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Ballard has positions in Advanced Micro Devices and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Intel, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2025 $30 calls on Intel. The Motley Fool has a disclosure policy.
Wall Street Sees 48% or More Upside for These AI Stocks. Should You Buy Them? was originally published by The Motley Fool
