The club's former striker, who left Highbury in 1995, watched the Gunners beat West Bromsich Albion 2-0 on Thursday night, a win that left the north London club 10 points behind Premier League leaders Leicester City.
Despite the win, Smith questioned the progress Arsenal can make under Wenger, who arrived at the club a year after his departure.
"You don't want to go out on a low after what he's achieved at this club, but he has always gone on record as saying if he felt he couldn't take the team forward and improve the team he would walk away," he told Sky Sports.
"Can he improve this team? I've got my doubts and I think a lot of other people have. He has been here a long time.
"When George Graham was here I played for him for eight years and by the end of that time we had heard all of his rollickings and all of his team talks. It does get a bit stale.
"Wenger has done well to last 20 years, but I go back to words like 'optimism' and 'excitement'. Will there be that inside this stadium for the first kick-off of next season given the situation with the other clubs and all their new managers?
READ MORE | Arshavin: Arsenal problems down to Wenger
"With the group they have got I don't think the chemistry is right in terms of leaders and nastiness sometimes, but I maintain you could get a better performance out of that group than Arsene Wenger has managed to get.
Smith identified Atletico Madrid manager Diego Simeone as a suitable replacement for Wenger, suggesting the Gunners would be a harder to break down under the Argentine.
"For instance, Diego Simeone is a complete contrast; black and white really," he added. "They would be harder to beat with him at the helm.
"That's probably a fair comment because of the steel he would bring to it. Arsene Wenger is a much different manager."