Prediction: This Tech Stock Could Take Off After iPhone 16 Release (Hint: It’s Not Apple)

AppleHis long-awaited event on September 9 is finally in the rearview mirror, and it’s safe to say that there was nothing surprising. The tech giant has unveiled a new generation of iPhones that will support generative artificial intelligence (AI).

The new iPhone 16 line will get its first batch of generative AI features next month via a software update. The company will reportedly gradually introduce AI tools from its Apple Intelligence suite of generative AI features as it tries to make inroads into an emerging smartphone niche it expects to discover in the long run.

Market research firm IDC is forecasting 364% year-over-year growth in generative AI smartphone shipments this year to 234 million units. More importantly, the generative AI smartphone market is expected to grow at an annual rate of 78% through 2028, with annual shipments of 912 million units according to IDC.

So Apple is moving into the generative AI smartphone market at an opportune time when demand for these devices is booming. That explains why Wedbush analyst Dan Ives expects Apple’s latest iPhones to start a solid upgrade cycle, with shipments expected to grow by double digits in 2024, compared to last year’s nearly 4 percent increase in shipments. The company is expected to ship 240 million iPhones in fiscal 2025 due to the growing adoption of AI smartphones.

Now, it remains to be seen whether AI-enabled iPhones are good enough to give Apple’s top and bottom lines a nice boost. However, there is one company that could be a bigger beneficiary of Apple’s iPhone 16 launch than the Cupertino tech giant — Arm holds (NASDAQ: ARM). Let’s look at the reasons.

The iPhone 16 lineup could boost Arm Holdings’ revenue and margins

Apple emphasizes that its latest smartphones are “built for Apple Intelligence.” To do this, 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 have the A18 Pro chip inside.

Apple designed this chip using Arm Holdings’ Armv9 architecture, according to Financial Times. Announced in 2021, the Armv9 architecture focuses on AI, security and performance improvements over the previous generation Armv8 architecture that was released in 2011. So, it is not surprising to see that Apple has decided to go with this architecture to make its develop the latest architecture. iPhone processors so that they can support AI functions.

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In comparison, Apple used the Armv8 architecture until last year when it launched the iPhone 15 models. While the transition to Armv9 could be good news for iPhone users, as they will finally be able to use AI features, apart from that they will witness a potential jump in performance, could be even better news for Arm investors.

That’s because Armv9 “commands a higher per-chip royalty than previous architectures,” as management pointed out in a recent earnings presentation. Arm CEO Rene Haas said royalties from the Armv9 architecture could be double that of its predecessor, Armv8. A closer look at management’s commentary on Arm’s July earnings call does suggest that Armv9 is moving the needle in a bigger way for the company.

In Haas’s words:

Clearly, the adoption of Armv9 has resulted in a much stronger increase in Arm’s revenue relative to the number of units the company has shipped. As a result, the company’s total revenue rose 39% year-over-year in the first quarter of fiscal 2025 to $939 million. More importantly, Arm’s remaining performance obligations also rose 29% year-over-year as the company sold more licenses to customers looking to develop AI chips.

And now that Apple’s iPhone shipments are expected to increase after the launch of its latest lineup, it won’t be surprising to see Arm’s royalty income rise substantially thanks to Armv9. The important thing to note here is that even if Apple does not witness a significant rise in shipments on the back of the iPhone 16 launch, Arm Holdings would still be a winner due to the potentially higher royalties it stands to receive from Cupertino.

Higher royalties could translate into tremendous earnings growth

Apple isn’t the only smartphone stakeholder to switch to the Armv9 architecture. Leading smartphone processor company Qualcomm has already used this architecture, as has the Chinese giant MediaTek. So, Arm Holdings is well positioned to make the most of the booming 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 probably explains why analysts are forecasting an acceleration in Arm’s economic growth. The company ended fiscal 2024 with earnings of $1.27 per share, meaning its bottom line could rise 23% in the current fiscal year to $1.57 per share, according to consensus estimates. The earnings estimate of $2.07 per share for the next fiscal year indicates that Arm’s earnings could grow at a much healthier rate of 32%, which is why investors looking to benefit from Apple’s latest iPhones in particular and AI smartphones in general may consider buying Arm Holdings. as its long-term prospects appear to be solid.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Qualcomm. The Motley Fool has a disclosure policy.

Prediction: This Tech Stock Could Take Off After iPhone 16 Release (Hint: It’s Not Apple) was originally published by The Motley Fool