Over the past year or so, there has been a lot of talk about the impact of artificial intelligence (AI). The consensus is that these recent advances are revolutionary and will increase human productivity several times over by automating an increasing number of time-consuming tasks. As companies scramble to profit from these advances, some worry that the market has entered an AI bubble.
arm holdings (arm 0.41%) CEO Rene Haas has no doubts about which camp he falls into. “AI is in no way shaping or shaping the hype cycle,” he said. “We believe AI is the biggest opportunity of our lifetimes, but we are only at the beginning.”
That may seem like an exaggeration, but many in the tech industry have adopted that view. Estimates range, but the potential economic impact could be enormous. According to global management consulting firm McKinsey & Company, the value of generative AI is estimated to be between $2.6 trillion and $4.4 trillion annually. Companies on the leading edge of this long-term tailwind could end up reaping a veritable windfall.
It's no coincidence that Arm Holdings is one of these companies and stands to benefit from the AI revolution.
Image source: Getty Images.
Huge library of intellectual property
To understand Arm's place in the vast AI ecosystem, it helps to know a little about the company's strategy. Arm Holdings was founded in 1990 to transform the computing industry. After a product failure in 1993, the company changed its business model. Arm begins chip development and licensing design There has been a complete pivot to intellectual property (IP) rather than the chips themselves.
Over the next two decades, Arm became a powerhouse in the semiconductor industry, creating and licensing the blueprints for some of the world's most widely used chips. The company's expertise powers a variety of devices including smartphones, tablets, computers, and smart TVs. In fact, Arm estimates that its processors are used by 70% of the world's population. Importantly, his AI-centric designs are heavily used in cloud computing, hyperscale computing, and data centers.
Because Arm develops and licenses its processor designs, it can achieve significant economies of scale and do so at a much lower cost than most companies can achieve on their own.
Big opportunity for AI
if Nvidia is the king of AI, but Arm Holdings is definitely the queen.
Nvidia's graphics processing units (GPUs) are the gold standard for training and running AI models. What does this have to do with arms? The company's high-end central processing units (CPUs) play a key role in AI processing. For example, Nvidia's GH200 Grace Hopper superchip — which integrates accelerated CPU and GPU technology to meet the computational demands of AI — uses 144 Arm version 9 (V9) CPU cores.
Nvidia isn't the only company relying on Arm's latest processors. microsoft's new AI-centric server chip contains over 100 AIs. In a recent interview, Haas noted that many customers are switching to his V9. This core not only offers better processing power, but also doubles the royalty rate of the previous generation core, which is a boon for Arm.
Long-term tailwinds from AI are starting to show in Arm's results.For the company's fiscal third quarter of 2024 (ending December 31, 2023), Arm record Revenues increased 14% year-over-year to $824 million, supported by an 18% increase in licensing revenue. record Royalty income increased 11%. As a result, adjusted earnings per share (EPS) was $0.29, an increase of 32%. But that's only part of the story.
Arm's remaining performance obligations (RPO), or revenue with contractual obligations not yet reflected in revenue, rose 38% year over year to $2.43 billion. This suggests that revenue growth is likely to continue accelerating.
Management's forecasts appear to support that claim. Arm's fourth quarter sales are expected to be in the range of $850 million to $900 million, representing growth of 34% to 42%. more than twice It recorded 14% growth in the third quarter.
To kick off the GPU Technology Conference (GTC) last week, Nvidia debuted its long-awaited Blackwell architecture that takes AI processing to the next level. The Blackwell GB200 superchip includes two of his B200 GPUs and one Arm-based Grace CPU. Although specific details have not yet been revealed, there is no doubt that this will solidify Arm's place in the AI revolution.
Arm can be tricky for investors who rely on the most common valuation metrics. The company's stock currently trades at a forward P/E ratio of 109 times and next year's sales at 34 times. However, these metrics do not take into account Arm's significant growth trajectory. The forward price/earnings ratio (PEG), which takes into account this growth, is below 1, which is the standard for cheap stocks.
Given Arm's decades of expertise, ubiquitous chip blueprint, and accelerating demand for AI, Arm could represent a once-in-a-generation investment opportunity.
Danny Vena has held positions at Microsoft and Nvidia. The Motley Fool has a position in Microsoft and He recommends Nvidia. The Motley Fool recommends the following options: His January 2026 $395 long call on Microsoft and his January 2026 $405 short call on Microsoft. The Motley Fool has a disclosure policy.
