Better Artificial Intelligence Stock: Strategy vs. Arm Holdings

Artificial intelligence (AI) is a great sector to invest in as a rapidly expanding industry with years of growth ahead. And you have a wide selection of AI companies to choose from when making an investment decision.

Two prominent tech businesses to consider here are Strategy (NASDAQ: MSTR), previously known as MicroStrategy before rebranding this month, and Arm Holdings (NASDAQ: ARM). Strategy is a software company founded in 1989; Arm is a leader in semiconductor designs.

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Strategy's shares have risen 380% over the past 12 months through the week ending Feb. 14. Arm stock also had an impressive run, going from a 52-week low of $85.61 last April to a high of $188.75 in July, with shares remaining well above their low at the time of this writing.

Although both stocks enjoyed gains, several reasons make one a better AI investment than the other. Read on to learn which is superior for the long haul.

A look at Strategy stock

The company formerly known as MicroStrategy uses generative artificial intelligence in its analytics software. Its platform helps customers analyze their business data, and its AI allows them to quickly gain insights from this data.

Strategy transitioned from selling software licenses to a subscription-based cloud computing business. This approach provides predictable recurring revenue, and the fourth quarter had a 57% year-over-year increase in subscription billings to $64.8 million.

But even with subscription revenue rising, Strategy's $120.7 million in fourth-quarter sales represented a 3% year-over-year decline. Its 2024 full-year revenue of $463.5 million was a 7% drop compared to 2023's $496.3 million.

With declining sales, Strategy's share price gains weren't due to its AI offerings, but rather its investments in Bitcoin. The business describes itself as "the largest corporate holder of Bitcoin and the world's first Bitcoin Treasury Company."

It held over 470,000 bitcoins, valued at about $46 billion, as of Feb. 4. Yet to fund that substantial position in the cryptocurrency, Strategy issued stock and took on significant debt.

Issuing more stock means Strategy dilutes its shareholders. As for its debt load, the fourth-quarter balance sheet showed total liabilities of $7.6 billion with $7.2 billion of that in debt.

The case for Arm Holdings

Arm Holdings dominates the market for smartphone semiconductor designs with an estimated 99% share. The company achieved such dominance because of its hardware's energy efficiency, a necessary feature to extend the battery life of mobile devices.

Its chips are winning customers in the AI market as well because that technology consumes massive amounts of energy, so Arm can help these systems become more energy efficient.

The company generates revenue by licensing its semiconductor designs and collecting royalties on them, even years after the initial sale. For instance, it's still receiving royalties from products made in the 1990s.

The approach, coupled with the popularity of its chip designs, enabled the company to reach record revenue of $983 million in its fiscal third quarter, ended Dec. 31. This represented 19% year-over-year sales growth as royalty income reached a record $580 million.

Not only are sales rising, but Arm's financials also are strong. Its fiscal third-quarter gross margin was an astounding 97.2%, up from the prior year's 95.6%, and superior to Strategy's healthy 72% margin. Consequently, Arm's third-quarter net income rose 190% year over year to $252 million.

Arm also exited the fiscal third quarter with total assets of $8.5 billion versus $2.1 billion in total liabilities. The company's cash and equivalents of $2 billion alone nearly eclipses its liabilities, underscoring the strength of its balance sheet.

Now, the company seems to be taking its business a step further. According to recent news reports, Arm is expanding beyond licensing its designs to making its own chips and has already secured Facebook parent Meta Platforms as a customer.

Deciding between Strategy and Arm

Since this analysis compares Strategy and Arm from the perspective of which is the better AI investment, the winner is Arm Holdings. While Strategy uses AI in its software, that part of its business is seeing sales fall year over year, indicating it's struggling against other AI competitors in the data analytics field, such as Palantir.

Meanwhile, Arm's AI offerings are opening up long-term opportunities. For example, the company is participating in the U.S. government's Stargate Project, which plans to invest a half-trillion dollars into AI infrastructure.

When comparing the two stocks' valuations, Arm wins, too. Here's a look at each stock's valuation using the price-to-sales ratio (P/S), which measures how much investors are willing to pay for every dollar of revenue.

Data by YCharts.

In recent months, Strategy's P/S multiple has skyrocketed and is about triple Arm's figure as of Feb. 18. This indicates Arm shares are the better value.

That said, both Strategy and Arm are quite pricey at the time of this writing. Arm is the better AI investment between these two companies, but it's ideal to wait for its share price to drop before deciding to buy.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Robert Izquierdo has positions in Arm Holdings, Meta Platforms, and Palantir Technologies. The Motley Fool has positions in and recommends Bitcoin, Meta Platforms, and Palantir Technologies. The Motley Fool has a disclosure policy.