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AppleThe long-awaited event of September 9 is finally in the rearview mirror, and it would be safe to say there wasn’t much to be surprised about. The tech giant unveiled a new generation of iPhones that will support generative artificial intelligence (AI).
The new iPhone 16 series gets its first batch generative AI features next month via a software update. It appears the company will gradually introduce AI tools from its Apple Intelligence suite of generative AI features as it looks to make a dent in an emerging smartphone niche that is expected to boom in the long term.
Market research firm IDC predicts a 364% increase in shipments of generative AI smartphones to 234 million units this year. More importantly, the generative AI smartphone market is expected to grow 78% annually through 2028, with annual shipments of 912 million units according to IDC.
So Apple is entering the generative AI smartphone market at an opportune time when demand for these devices is exploding. That explains why Wedbush analyst Dan Ives expects Apple’s latest iPhones to enter a solid upgrade cycle, with shipments expected to rise by double digits in 2024 compared to the nearly 4% increase in shipments last year. The company is expected to ship 240 million iPhones in fiscal 2025 thanks to growing adoption of AI smartphones.
Now it remains to be seen whether the AI-enabled iPhones are good enough to give Apple’s top and bottom line a nice boost. However, there’s one company that could be a bigger beneficiary of Apple’s iPhone 16 launch than the Cupertino-based tech giant itself: Arm positions (NASDAQ:ARM). Let’s look at the reasons why.
The iPhone 16 series could boost Arm Holdings’ sales and margins
Apple points out that its latest smartphones are “built for Apple Intelligence.” To make this possible, the company has developed a new smartphone chip: the A18. The iPhone 16 and iPhone 16 Plus will be powered by the A18 chip, while the Pro and Pro Max versions will feature the A18 Pro chip.
Apple reportedly designed this chip using the Arm Holdings Armv9 architecture Financial times. Announced in 2021, the Armv9 architecture emphasizes AI, security and performance upgrades over the previous generation Armv8 architecture launched in 2011. So it is not surprising to see that Apple has reportedly decided to opt for this architecture to develop its latest technology. iPhone processors so they can support AI features.
By comparison, Apple used the Armv8 architecture until last year, when it launched the iPhone 15 models. While the move to Armv9 could be good news for iPhone users as they can finally use AI features, aside from a potential performance boost, it could be even better news for Arm investors.
That’s because Armv9 “requires a higher royalty per chip than previous architectures,” as management noted in a recent earnings presentation. Arm CEO Rene Haas has said that royalties from the Armv9 architecture could be double those of its predecessor, the Armv8. A closer look at management commentary on Arm’s July earnings conference call indeed suggests that Armv9 is moving the needle in a bigger way for the company.
In the words of Haas:
Every chip designed today needs a CPU, and they are designed with Arm in mind, with our strong ties to software around the world… [T]This has led to significant growth in royalty revenue, increased value per chip… [In fact, the] v9 [is] up to 25%… [of] royalty income of the total.
That is 20% more than in the previous quarter. Most importantly, our smartphone royalty revenue increased 50% year-on-year. That’s against a single-digit increase in the number of units.
Clearly, the adoption of Armv9 has led to a much larger increase in Arm’s revenues relative to the number of units the company shipped. As a result, the company’s total revenue in the first quarter of fiscal 2025 shot up a whopping 39% year over year to $939 million. More importantly, Arm’s remaining performance commitments also increased 29% from the same quarter last year as the company sold more licenses to customers looking to develop AI chips.
And with Apple’s iPhone shipments expected to increase following the release of its latest lineup, it won’t be surprising to see Arm’s royalty revenues also increase substantially thanks to Armv9. The important thing to note is that even if Apple doesn’t see a meaningful increase in shipments as a result of the iPhone 16 launch, Arm Holdings would still remain a winner due to the potentially higher royalties it will receive from Cupertino.
Bigger royalties could translate into great profit growth
Apple isn’t the only smartphone stakeholder to have switched to the Armv9 architecture. Leading smartphone processor company Qualcomm already uses this architecture, just like the Chinese chip giant MediaTek. Arm Holdings is thus well positioned to take full advantage of the growing demand for generative AI smartphones, and the growing demand for the Armv9 architecture will allow the company to generate higher margins due to higher royalties.
This likely explains why analysts are predicting an acceleration in Arm’s net growth. The company ended fiscal 2024 with earnings of $1.27 per share, meaning operating income could rise 23% to $1.57 per share in the current fiscal year, according to consensus estimates. The earnings forecast of $2.07 per share for the next fiscal year indicates that Arm’s earnings could grow at a much healthier pace of 32%. Therefore, investors looking to profit from Apple’s latest iPhones in particular and AI smartphones in general may want to consider buying Arm Holdings. as the long-term prospects appear solid.
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Hard Chauhan has no position in any of the stocks mentioned. The Motley Fool has and recommends positions in Apple and Qualcomm. The Motley Fool has one disclosure policy.
Prediction: This Tech Stock Could Take Off After the Launch of the iPhone 16 (Hint: It’s Not Apple) was originally published by The Motley Fool