Who is the biggest winner from Apple Intelligence? It’s this stock AI, not Apple.

Apple (AAPL 0.05%) unveiled the latest steps in its artificial intelligence (AI) strategy on Monday, with a “Glowtime” event focused on its iPhone 16 lineup, its first new phone launch since introducing Apple Intelligence in June.

The latest line of phones will all be compatible with the new generative AI features scheduled to launch on iOS 18. Apple’s launch of the new phones and Apple Intelligence will likely be the biggest test of demand for generative AI technology yet .

Cloud infrastructure companies and start-ups have invested billions of dollars in AI infrastructure, buying Nvidia components and filling data centers to build and run generative AI applications like ChatGPT, but until now there has been no significant business beyond the increased demand for hardware components.

There isn’t really a generative AI-based “killer app,” and generative AI-based software hasn’t taken off the way some might have expected when ChatGPT launched nearly two years ago. However, Apple has a better chance of changing this than any company that has come before it, as Apple Intelligence will come with generative AI writing tools such as text rewriting, image generation and visual intelligence, which allows users to get information from just a photo.

In other words, demand for the new crop of iPhones will be the biggest test yet of the broader demand for generative AI and its marketability.

However, Apple shares didn’t get the boost from the news that some might have expected, ending Monday essentially flat.

Image source: Getty Images.

An AI stock that emerged as a winner

While Apple shares were flat on the news, one key supplier jumped. Arm holds (ARM -0.81%)which designs Apple’s processor architecture, rose on the presentation, ending Monday’s session up 7%.

Importantly, Apple’s new A18, which powers the iPhone 16, will run on Arm’s latest CPU architecture, v9, which commands twice the royalties of its predecessor, v8.

Apple is also Arm’s most valuable customer, as the iPhone accounts for about half of the company’s revenue.

Of course, Apple will benefit from strong iPhone 16 sales, but according to these numbers, Arm will be an even bigger beneficiary if the new iPhones are a hit.

If iPhone 16 units increase by 10% over iPhone 15, Arm’s royalties from the iPhone would increase by 120%, as royalty rates will have doubled from the previous year. If iPhone sales make up half of the company’s royalty income, then that alone would increase royalty income by 60%, even if the rest of the business is flat.

Another way Arm wins

Arm dominates the smartphone CPU architecture market with more than 99% market share. This is largely due to its power-efficient architecture, which helps preserve battery life, but the company also sees a growing opportunity in the data center from the AI ​​boom as processors its Graces are also used by Nvidia in the Grace Hopper and upcoming Grace Blackwell superchips. .

The same advantage Arm has over x86-based competitors such as Intel and AMD it also applies to the data center, as AI applications require huge amounts of energy, and running them as efficiently as possible will help companies save money. Actually, Applied materials CEO Gary Dickerson recently said, “In our discussions with leading AI companies, they tell us that reducing power per operation is now more important than increasing operations per second.”

If Apple Intelligence catches on, proving a bigger market for AI devices, it could trigger a supercycle of demand for Arm components in smartphones, the data center, PCs and beyond.

Arm’s momentum is already building with licensing revenue, a precursor to royalties, up 72% in its most recent quarter. If the iPhone 16 takes off, Arm looks set to cash in, and the stock has plenty of upside potential in AI beyond that.