In recent years, there has been an insatiable hunger for artificial intelligence (AI) chips across the tech landscape. From juggernaut companies to scrappy startups, the quest for cutting-edge chips to power AI models and applications has surged. With the technology’s swift proliferation, the growth outlook for AI applications is soaring to new heights. Consequently, the stock prices of various AI companies are flying high.

Yet, as some of these AI stocks ascend to dizzying heights, caution flags are being waved by analysts who fear an impending “AI bubble.” Leading the pack is GPU chip powerhouse Nvidia Corp (NVDA), an early player in the AI game. Nvidia has experienced a meteoric rise of nearly 244% over the past year, propelling its market cap to over $2 trillion.

However, following a recent correction that shaved roughly 10% off Nvidia’s value, attention is now turning to a handful of AI chip stocks that appear even more overvalued compared to the reigning king, Nvidia. Here’s a closer look at these challengers and the essential numbers for investors.

AI Chip Stock #1: Arm Holdings (ARM)

Hailing from the UK, Arm Holdings Plc ADR (ARM) stands as a premier player in semiconductor and software design, specializing in intellectual property (IP) development and licensing for CPU products and associated technologies. Arm’s innovations underpin myriad electronic devices, spanning from smartphones to sensors, and are increasingly vital in the realms of IoT and AI. The company presently commands a market cap of $130.5 billion.

Since its return to public markets last year, ARM’s stock has been on a joyride to the stars, with a YTD climb of 73.8%, comfortably eclipsing the S&P 500 Index’s modest 8.6% progress over the same period.

At present, Arm Holdings’ stock is trading at a lofty 108.42 times forward earnings, more than twice the valuation of NVDA, which carries a P/E ratio of 40.39x. Factoring in analysts’ 2025 earnings growth estimate of 24.8%, ARM boasts a price-earnings-to-growth (PEG) ratio of 2.37x, significantly outstripping NVDA’s ratio of 1.36x.

The stock witnessed a surge post its positive earnings release on Feb. 8. With fiscal Q3 revenue clocking a 14% year-over-year rise to $824 million, surpassing analyst estimates, and an adjusted EPS of $0.29 that beat projections, Arm Holdings received an added boost from Nvidia’s mammoth $147 million investment in the company last month.

Looking ahead to Q4 2024, ARM forecasts an EPS range of $0.28 to $0.32, coupled with revenue between $850 million and $900 million. The company also upped its fiscal year 2024 guidance in the bracket of $3.16 billion to $3.21 billion, with adjusted EPS anticipated between $1.20 and $1.24.

Analysts paint Arm Holdings in a favorable light with a consensus “Moderate Buy” rating. Among 23 analysts covering the stock, 13 advocate a “Strong Buy,” nine propose a “Hold,” and one advises to “Strong Sell.” The average analyst target price for Arm Holdings stands at $92.53, already eclipsed by the stock’s current levels. Topping the street-high price target at $180, set by Rosenblatt in February, hints at a potential 38.7% upside from its current standing.

AI Chip Stock #2: Advanced Micro Devices (AMD)

Established in 1969, Advanced Micro Devices (AMD) calls Santa Clara its home and holds a prominent position in the semiconductor arena, influencing the data center, embedded, gaming, and PC domains. AMD’s legacy in advancing modern computing is well-regarded, reflected in its current market cap of $305.70 billion.

AMD’s stock has vaulted 94.8% over the past year, surpassing the S&P’s 30.3% gains.

Presently, the stock is trading at a pricey 70.18 times forward earnings, marking a significant premium over NVDA’s 40.39 P/E ratio. Similarly, AMD’s PEG ratio of 2.81x dwarfs that of NVDA, implying a rich valuation relative to its AI chip cohort.

In its Q4 performance, AMD’s revenue of $6.17 billion sailed past Wall Street’s $6.14 billion estimate, with an adjusted EPS of $0.77 hitting the consensus mark. Looking into Q1 2024, AMD foresees a revenue around $5.4 billion, give or take $300 million. The company’s 2024 outlook includes over $2 billion in AI chip sales, underscoring its strides in the generative AI computing sector.

Advanced Micro Devices garners a unanimous “Strong Buy” consensus from analysts. Out of 33 analysts covering the stock, 27 advocate a “Strong Buy,” one leans towards a “Moderate Buy,” while five suggest “Hold.” The average analyst price target for AMD sits at $189.43, nearly mirroring Monday’s closing price. Nevertheless, with a bullish high target of $270 set by KeyBanc in January, there’s a potential uptrend of 41.6% from current levels.

ASML Holding N.V. and Its Dominance in the Semiconductor Market

The Rise of ASML Holding N.V.

ASML Holding N.V., established in 1984 in the Netherlands, has solidified its position as a key player in the semiconductor industry. The company specializes in developing, producing, and servicing advanced semiconductor equipment systems, particularly in the lithography, metrology, and inspection systems segment. With a market capitalization of $370.9 billion, ASML has established a virtual monopoly in its niche.

Stellar Performance and Market Outperformance

Over the past 52 weeks, ASML Holding’s stock has surged by an impressive 48.5%, significantly outperforming the broader market. This stellar performance is a testament to the company’s robust growth trajectory and strategic positioning in the semiconductor sector.

Financial Insights and Analyst Recommendations

Trading at 46.93 times forward earnings, ASML Holding comes across as a relatively cheaper option compared to some of its competitors. The company’s Price/Earnings to Growth (PEG) ratio of 2.32x indicates that it is slightly pricier in terms of anticipated growth than some industry peers.

ASML’s recent financial results have been impressive, with Q4 net sales reaching $7.79 billion and a notable gross margin of 51.4%. Earnings per share also saw an uptick to $5.60, surpassing Wall Street’s expectations. The company’s Q4 order intake witnessed a significant surge, demonstrating strong demand for its offerings.

Analysts are overwhelmingly bullish on ASML Holding, with a consensus “Strong Buy” rating. Out of 17 analysts, 13 recommend buying the stock, while four suggest holding positions.

Future Growth Potential and Price Targets

The average analyst price target for ASML stands at $927, presenting a slight discount to the current trading price. However, the high-end price target of $1,100 indicates a potential rally of up to 16.8% from current levels. This optimistic outlook underscores the market’s confidence in the company’s future growth prospects.

On the date of publication, Sristi Suman Jayaswal did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.