ARM vs QCOM: One Is a Better Buy After Earnings Sell-Off

💡 Key Takeaway

Arm's dominant mobile chip architecture and AI growth potential make it the better long-term buy, but its sky-high valuation means investors should wait for a better entry point.

Earnings Miss and Post-Election Sell-Off Hit Chip Stocks

Qualcomm (QCOM) and Arm Holdings (ARM) both reported quarterly earnings on November 4, and both stocks plummeted roughly 14% the next day. The sell-off coincided with a massive post-election market decline, with the Nasdaq Composite dropping about 1,000 points, or 4%.

Qualcomm's revenue fell 8% year over year to $10.44 billion, though it beat estimates. Adjusted earnings dropped 28% to $2.17 per share, also slightly above expectations. However, its guidance for the current quarter came in weak, with earnings expected below consensus.

Arm posted record revenue of $1.44 billion, up 27% year over year, with licensing revenue jumping 50%. Both revenue and earnings beat estimates, and its guidance also topped consensus. But the stock fell due to slower royalty growth and a valuation that leaves little room for error.

Arm licenses chip architecture to companies like Qualcomm and Apple, holding a 99% market share in mobile. Qualcomm designs chips and holds about 23% of the mobile chip market, second to MediaTek. The two have been in legal disputes, with a jury recently siding with Qualcomm.

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What This Means for Me

If you hold ARM, consider trimming your position or waiting for a better entry point if you're looking to add. Investors with exposure to QCOM should monitor margin trends and guidance closely, as the stock could remain under pressure. Those holding AAPL have minimal direct impact, but Apple's reliance on Arm's architecture means any strategic shifts at Arm could affect future product development.

Valuation and Growth Prospects Diverge

Arm's stock has been a juggernaut since its September 2023 IPO, up 55% year to date and averaging a 47% annualized return over three years. Its dominance in mobile chip architecture and expansion into AI data centers give it a long growth runway. However, its price-to-earnings ratio of 220 is extremely rich, meaning any hiccup can trigger a sharp sell-off.

Qualcomm is much cheaper at 19 times earnings, but it faces headwinds from rising supply costs that are squeezing margins. Its revenue is declining, and its guidance suggests earnings pressure will continue. The stock is down 8% this year.

For investors, the key question is whether Arm's growth justifies its premium or if Qualcomm's low valuation offers a better risk-reward. The market seems to favor Arm's long-term story, but the recent sell-off highlights the risks of paying up for growth.

Both companies are leaders in the mobile chip space, but they occupy different niches. Arm's licensing model gives it a moat, while Qualcomm's chip design business is more cyclical and competitive.

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Stock to Watch

StocksImpactAnalysis
QCOM
Negative
Qualcomm faces declining revenue, margin pressure from rising supply costs, and weak guidance, making its cheap valuation less appealing.
AAPL
Neutral
Apple is a licensee of Arm's technology, so its products depend on Arm's architecture, but the news has no direct impact on Apple's stock.

Source: The Motley Fool
Analysis generated by Bobby AI quantitative model, reviewed and edited by our research team. This is not financial advice. Always do your own research before making investment decisions.

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Bobby Insight

bobby-insight

Avoid both stocks for now; wait for Arm's valuation to become more reasonable or Qualcomm's fundamentals to improve.

Arm is the better long-term growth story due to its market dominance and AI potential, but its 220x P/E is too expensive. Qualcomm is cheap but faces operational challenges that could limit upside. Neither offers a compelling risk-reward at current levels.

What This Means for Me

means-for-me
If you hold ARM, consider trimming your position or waiting for a better entry point if you're looking to add. Investors with exposure to QCOM should monitor margin trends and guidance closely, as the stock could remain under pressure. Those holding AAPL have minimal direct impact, but Apple's reliance on Arm's architecture means any strategic shifts at Arm could affect future product development.

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