Apple(NASDAQ: AAPL) showcased its strides in the realm of artificial intelligence (AI) during its “Glowtime” event, where it introduced the latest iPhone 16 lineup. This launch marked the debut of Apple Intelligence, a concept introduced in June, promising a new era for generative AI technology.
The incorporation of generative AI features into the new iPhones, set to be released with iOS 18, signifies a milestone for the technology’s market test. While cloud infrastructure and tech startups have heavily invested in AI infrastructure, including utilizing components from Nvidia, there has yet to be a killer app that propels generative AI into mainstream success.
However, Apple’s emphasis on generative AI, with features like text rewrite, image generation, and Visual Intelligence, could be a game-changer. The success of the new iPhone models will be a litmus test for the broader acceptance and commercial viability of generative AI.
Image source: Getty Images.
Arm Holdings Emerges Victorious
While Apple’s stock remained steady post the announcement, one crucial player witnessed a significant surge. Arm Holdings(NASDAQ: ARM), the designer of Apple’s CPU architecture, saw a 7% surge following the event. Notably, Apple’s new A18 chip, powering the iPhone 16, operates on Arm’s latest CPU architecture, the v9, commanding double the royalties of its predecessor, the v8.
Being Arm’s most valuable client, Apple holds a powerful position, contributing nearly half of Arm’s revenue. Consequently, while Apple stands to gain from robust iPhone 16 sales, Arm could emerge as the bigger winner if the new iPhones resonate with consumers.
A mere 10% increase in iPhone 16 sales from the iPhone 15 would trigger a 120% jump in Arm’s iPhone royalties, attributable to the doubled royalty rates. Even if iPhone sales solely constitute half of Arm’s royalty earnings, this surge could propel royalty revenue up by 60%, even if the remainder of the business remains constant.
Arm’s Multifaceted Gains
Arm holds a dominant position in smartphone CPU architecture, boasting over 99% market share. Its power-efficient architecture, crucial for preserving battery life, has enabled its unrivaled position. With the rise of AI applications in the data center, Arm’s Grace CPUs, also utilized by Nvidia, are increasingly pivotal. This power efficiency advantage over competitors like Intel and AMD is critical for data centers as AI operations demand substantial energy efficiency.
If Apple Intelligence gains traction and propels a heightened demand for AI devices, the ensuing supercycle may boost Arm’s component sales across smartphones, data centers, PCs, and beyond. Notably, Arm’s licensing revenue surged by 72% in the latest quarter, signaling potential growth, especially if the iPhone 16 performs exceptionally well.
Investing in Arm Holdings: A Strategic Move?
Before diving into Arm Holdings’ stocks, investors should carefully evaluate their options. While Arm Holdings wasn’t listed among the top 10 best stocks by the Motley Fool Stock Advisor analyst team, it remains an intriguing contender for potential gains in the AI landscape.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Applied Materials, and Nvidia. The Motley Fool recommends Intel and suggests options such as short November 2024 $24 calls on Intel. The Motley Fool operates under a comprehensive disclosure policy.