Both Arm Holdings plc ARM and Synopsys, Inc. SNPS are powerhouses operating within the semiconductor design playfield, benefiting from the upsurge in AI chip demand. While ARM licenses processor architectures, SNPS offers electronic design automation software and IP used to design and verify advanced chips.
Let us delve deeper to find out which stock would provide an upside to investors.
The Case for Arm Holdings
ARM registered record revenues of $1.5 billion in the fourth quarter of fiscal 2026, hinting at a 20% year-over-year jump. This solid growth can be attributed to the company’s strength in its powerful dual-sided network effect that links software creators and hardware manufacturers in a self-reinforcing loop. ARM’s heightened presence within consumer technology through partnership with tech powerhouses like Apple, Qualcomm and Samsung positions it ahead of the curve.
The AI and IoT landscapes have bolstered ARM as a prominent player within the hyperscaler market. Arm-based Compute and Neoverse Compute Subsystems now represent nearly 50% of the market share among top hyperscalers. Royalty revenues from data centers have more than doubled year over year, driven by ARM capturing nearly the entirety of the data center networking chips market.
Tech giants are showing keen interest in ARM’s customer silicon at scale. Google’s custom Arm Axion CPUs, coupled with its TPU8t/TPU8i architecture, provide an 80% performance enhancement at 80% less power over x86 setups. NVIDIA announced its next-gen Vera AI CPU, incorporating 256 Vera CPUs into a stand-alone liquid-cooled rack, while Meta is acting as a lead partner in developing multi-generation agentic solutions for users exceeding 3 billion.
While the company is cradled with an advantageous position within the AI-chip ecosystem, risk appears high on the China front. ARM’s growth in China is dipping slowly as Chinese companies incline toward RISC-V, an open-source chip.
As the strength of using indigenous products heightens, ARM’s market viability suffers, creating chaos among investors by forcing them to monitor ARM’s movement closely. Dipping toes in the hardware space attracts competition from giants like Intel and AMD.
The Case for Synopsys
SNPS registered 41.9% year-over-year growth in its top line during the second quarter of fiscal 2026. This growth was majorly driven by the maintenance and service segment that witnessed a nearly three times growth in its revenues.
Management is optimistic about the consistency of the company’s growth trajectory. For fiscal 2026, the top line is expected to reach $9.67 billion at mid-point from the prior guidance mid-point of $9.61 billion. On the same note, bottom-line expansion is expected to be driven by prudent cost discipline and faster integration synergies, resulting in an adjusted EPS of $14.76 for fiscal 2026.
Despite these positives, the company is laced with challenges that must be acknowledged. SNPS is facing pressure on its operating margin due to softness in its Design IP business. In the second quarter of fiscal 2026, this segment witnessed a decline of 720 basis points in its margin due to low revenues that impact profitability directly.
Synopsys shoulders the immense pressure of geopolitical risks, mainly from China, affecting its business prospects. With new export restrictions in China and geopolitical tension with the U.S., customers are turning cautious. While management is optimistic about the company’s financial prospects, challenges as such lower the chances of managing to hit the targets.
Competitive pressure from EDA vendors like Cadence Design Systems and Mentor Graphics Corporation is high. These companies offer products aimed at distinct phases of the IC design process and provide an array of services to companies globally to assist in optimizing their product development process. It could easily affect the company’s growth and profitability.
How Do Estimates Compare for ARM & SNPS?
The Zacks Consensus Estimate for ARM’s fiscal 2027 sales and EPS indicates year-over-year rallies of 20.7% and 18.6%, respectively. For fiscal 2028, revenues are anticipated to move up 39.4% from the preceding year, with EPS gaining 46.2%. Four EPS estimates have been trending upward over the past 60 days versus five downward adjustments.
The Zacks Consensus Estimate for SNPS’s 2026 sales and EPS indicates year-over-year growth of 36.5% and 11.9%, respectively. For 2027, revenues are anticipated to move up 10.3% from the preceding year, with EPS gaining 17.3%. One EPS estimate has been trending downward over the past 60 days versus no downward adjustments.
ARM’s Lofty Pricing Contrasts SNPS’s Stable Valuation
SNPS is currently trading at a forward 12-month price to sales (P/S) ratio of 9.89X, marginally higher than the 12-month median of 9.31X. ARM is trading at 50.69X, which is higher than the 12-month median of 28.42X. Synopsys is priced in line with its historical figure, while Arm Holdings is witnessing an aggressive valuation upsurge.
Verdict: ARM Provides an Upside
While both companies are strong players within the AI-chip market, Arm Holdings provides an upside due to soaring growth. Its powerful dual-sided network effect and robust data center networking demand have doubled its royalty revenues. Moreover, the expected exponential growth in top and bottom lines for fiscal 2028 justifies its premium valuation as hyperscalers adopt its bespoke architectures aggressively.
Conversely, we urge investors to sell SNPS due to its decelerating growth. The slowdown in margins in the Design IP business, geopolitical headwinds and competitive pressure from Cadence Design Systems and Mentor Graphics Corporation make its stable valuation unattractive. Hence, we recommend investors holding this stock to square off their positions. Potential buyers are urged to gauge the stock’s performance in the upcoming quarter before making any move.
ARM carries a Zacks Rank #3 (Hold), while SNPS has a Zacks Rank #4 (Sell) at present.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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This article originally published on Zacks Investment Research (zacks.com).