ARM vs. NVDA: Which AI Chip Designer is Worth Investing in?

Arm Holdings plc ARM and NVIDIA Corporation NVDA are both major beneficiaries of the AI computing boom, with their technologies increasingly intertwined across data centers and next-generation computing platforms.

Nvidia dominates AI accelerators through its GPUs, while Arm provides the energy-efficient CPU architecture increasingly used alongside those accelerators. Nvidia itself relies on Arm-based CPUs in platforms such as Grace and Vera, while Arm is expanding further into AI infrastructure with its own AGI CPU. Both companies are therefore positioned to benefit from rising spending on AI servers, cloud infrastructure and power-efficient computing.

AI Momentum Balances Arm’s Execution Risks

For a semiconductor intellectual-property provider, durable growth depends on expanding its architecture across end markets, increasing the royalty earned per chip and converting long-term licenses into recurring revenues. ARM’s presence across cloud AI, edge devices and physical AI supports this framework. However, the investment case also depends on customer shipments, licensing timing and successful execution of its move into production silicon.

Arm’s first-quarter fiscal 2027 results demonstrated momentum. Revenues increased 22.4% year over year to $1.29 billion, surpassing the Zacks Consensus Estimate by 1.8%. Royalty revenues rose 22% to $715 million, while license and other revenues advanced 23% to $574 million. Non-GAAP earnings increased 28.6% to 45 cents per share and beat the consensus estimate by 12.5%.

Cloud infrastructure is becoming a growth engine. Data-center royalties more than doubled as hyperscalers expanded deployments of Arm-based processors. Neoverse adoption, Armv9 designs and increasing use of Arm technology in networking equipment broaden the royalty opportunity. Meanwhile, AI-enabled PCs, vehicles and robotics extend the architecture into markets, reducing Arm’s dependence on smartphones.

The Arm AGI CPU adds a monetization avenue beyond licensing. Demand now exceeds $2 billion across fiscal 2027 and fiscal 2028, and Arm has secured capacity supporting the $1 billion opportunity. Nevertheless, scaling production introduces manufacturing, supply-chain and execution risks that differ from its asset-light licensing model.

Arm generated $665 million in non-GAAP free cash flow, and collection and tax-payment timing aided the figure. Cost growth warrants attention: non-GAAP operating expenses increased 18%, while research and development expenses rose 20%. GAAP operating margin declined to 7.1% from 10.8%, even as the non-GAAP margin improved.

Thus, Arm’s expanding AI exposure and strong growth are balanced by spending pressure, revenue variability and execution risk.

NVIDIA’s Scale and Platform Strength Support a Bullish View

For an AI infrastructure provider, durable growth depends on more than selling powerful processors. It requires an integrated platform that combines computing, networking and software, strengthens customer retention and captures spending across successive stages of AI adoption. NVIDIA’s portfolio fits this framework, supporting its long-term investment case as AI use expands from model training to inference and enterprise deployment.

The company’s financial results substantiate that thesis. In the first quarter of fiscal 2027, revenues surged 85% year over year to $81.62 billion, while non-GAAP earnings per share climbed 140% to $1.87. Data Center revenues reached $75.2 billion, accounting for roughly 92% of total sales and increasing 92% year over year and 21% sequentially.

NVIDIA expects second-quarter revenues of approximately $91 billion, implying nearly 95% year-over-year growth. Its projected non-GAAP gross margin of about 75% compared with 72.7% in the prior-year quarter reflects strong operating economics. The Zacks Consensus Estimate also indicates continued revenue and earnings growth in fiscal 2027 and fiscal 2028, supporting the view that AI infrastructure spending has further room to expand.

The company’s competitive position extends beyond GPUs. Blackwell deployments are driving demand, while the announced Vera Rubin platform strengthens NVIDIA’s next-generation roadmap. InfiniBand, Spectrum-X Ethernet and NVLink broaden its exposure to AI infrastructure spending, while CUDA and the wider software ecosystem create switching costs that reinforce customer retention.

Financial flexibility provides another advantage. NVIDIA generated $50.3 billion in operating cash flow and $48.6 billion in free cash flow during the quarter. Cash, cash equivalents and marketable securities increased to $80.6 billion from $62.6 billion sequentially. The company also repurchased $19.3 billion of shares and paid $243 million in dividends. Together, rapid growth, platform breadth and substantial liquidity reinforce a favorable long-term outlook.

NVDA has Stronger Growth Projections

The Zacks Consensus Estimate for NVDA’s fiscal 2027 sales and EPS indicates year-over-year growth of 85.4% and 93.3%, respectively. EPS estimates have been trending upward over the past 60 days.

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The Zacks Consensus Estimate for ARM’s fiscal 2027 sales suggests 21.8% year-over-year growth, while EPS is expected to grow 24.3%. EPS estimates have been trending upward over the past 60 days.

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NVDA’s Valuation is Cheaper

While NVDA appears attractively valued with a forward 12-month P/E of 17.49X versus its median of 25.87X, ARM's higher forward P/E of 92.9X, below its median of 128.33X, reflects investor confidence in its strong earnings growth potential.

NVDA Seems a Better Buy

Both Arm and NVIDIA are well positioned to benefit from expanding AI infrastructure spending. Arm’s royalty-led model, growing data-center presence and broader push into production silicon support its long-term prospects, but elevated valuation, rising expenses and execution risks limit near-term upside. NVIDIA’s superior growth outlook, dominant accelerator franchise, integrated networking and software ecosystem, strong cash generation and attractive valuation provide a more compelling risk-reward profile. With its platform leadership reinforcing customer retention and capturing a wider share of AI investment, NVIDIA stands out as the better investment choice.

NVDA sports a Zacks Rank #1 (Strong Buy), while ARM carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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