Arm Stock vs. Taiwan Semiconductor Stock: Wall Street Says Buy One and Sell the Other

Chipmakers Arm Holdings (NASDAQ: ARM) and Taiwan Semiconductor Manufacturing Company (NYSE: TSM) play critical roles in the artificial intelligence economy by supplying many of the largest technology companies. But Wall Street analysts expect the stocks to move in opposite directions over the next 12 months.

• Forecasts from 42 analysts give Arm a median price target of $144 per share. That implies 6% downside from its current share price of $154.
• Forecasts from 47 analysts give Taiwan Semiconductor a median price target of $236 per share. That implies 21% upside from its current share price of $195.

Those price targets imply that it's time to sell Arm and buy Taiwan Semiconductor. Here's what investors should know.

Arm: 6% implied downside

British semiconductor company Arm designs central processing units (CPUs) and compute subsystems, including systems management solutions and software tools that streamline the development of artificial intelligence (AI) applications. Arm does not sell CPUs, but rather licenses its intellectual property to clients that use it to build custom chips. The company generates revenue through licensing fees and per-device royalties.

Arm dominates the mobile processor market due to its energy efficient CPU architecture. In fact, it holds more than 99% market share in smartphones. Additionally, Arm is gaining share in personal computers (PCs) and data centers because its business model affords clients the flexibility to optimize chips to their specific needs. That differentiates the company from Intel and AMD, neither of which offer the same flexibility.

Consequently, several computer manufacturers have launch Arm-based AI PCs, and CEO Rene Haas believes Arm could capture 50% of the Windows PC market within five years, up from 11% today. Additionally, the three largest public clouds -- Amazon, Microsoft, and Alphabet -- have designed data center server CPUs based on Arm architecture.

Arm reported solid financial results in the first quarter of fiscal 2025 (ended June 2024), beating expectations on the top and bottom lines. Revenue rose 39% to $939 million, and non-GAAP net income increased 67% to $0.40 per diluted share. Management maintained its full-year guidance implying 18% to 27% revenue growth in fiscal 2025 (ends March 2025)

Going forward, Arm should benefit as AI becomes increasing prevalent. It enables clients to develop custom CPUs and compute systems optimized for specific end markets without substantial investments in R&D. Additionally, Arm has the largest compute ecosystem in the world with 20 million developers, which makes it likely its processors will continue to gain share in personal computers and data centers.

The problem is valuation. Wall Street forecasts Arm's adjusted earnings will grow at 25% annually through fiscal 2026. That consensus estimate makes the current valuation of 110 times adjusted earnings look expensive. Prospective investors should wait for a better entry point, and shareholders should consider trimming large positions.

Taiwan Semiconductor: 21% implied upside

Taiwan Semiconductor (TSM) is the largest semiconductor foundry as measured by revenue. That is a key advantage in the cost-intensive business of contract chipmaking. It lets the company outspend peers on R&D, which keeps it on the cutting edge of process technology (i.e., semiconductor manufacturing technology). TSM held 62% market share in foundry services in the second quarter, up 4 percentage points from the prior year, according to Counterpoint Research.

TSM says its 3-nanometer process node is the "industry's most advanced semiconductor technology offering best power, performance, and area." The ability to consistently build smaller, faster, and more power efficient chips has helped TSM win customers like Apple, Nvidia, and Broadcom. It also affords the company pricing power as evidenced by its industry-leading gross margin.

TSMC reported strong financial results in the third quarter. Revenue rose 36% to $23.5 billion, and earnings jumped 50% to $1.94 per ADR. "Our business was supported by strong smartphone demand and AI-related demand for our industry-leading 3-nanometer and 5-nanometer technologies," said CEO C.C. Wei. He also mentioned that revenue from server AI processors was on pace to more than triple this year.

Going forward, TSM is ideally positioned to monetize AI across end markets from smartphones to data center servers due to its customer relationships. For instance, Apple is the global revenue leader in smartphones, Nvidia is the leader in data center graphics processing units (GPUs), and Broadcom is the leader in custom AI accelerators.

Wall Street expects TSM's earnings to increase at 23% annually through 2025. That consensus makes the current valuation of 31 times earnings seem reasonable. Long-term investors should consider buying a small position in this semiconductor stock today.

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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. Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.