Currently, ARM Holdings acquires a large portion of its revenue from the smartphone market.
However, the adoption of its chip architecture has attracted attention with Edge AI devices.
The company's new chip design will allow it to generate stronger royalties.
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The adoption of artificial intelligence (AI) is growing at a healthy pace in a variety of applications, including data centers, smartphones, personal computers and other appliance devices. This is not surprising as AI is expected to significantly increase productivity and efficiency in the long term.
Goldman Sachs Last year, AI pointed out that productivity is driving an average increase of 25%. Naturally, demand for AI-enabled devices and infrastructure is set to grow at a healthy pace. Investors are Arm Holdings(NASDAQ:ARM)thanks to the presence of companies across multiple end markets that employ AI.
Let's take a look at why ARM is a good choice for driving next-generation AI-enabled smart devices.
Image source: Getty Images.
Smart devices are devices that are connected to the Internet and have AI and machine learning capabilities. They are usually deployed at the edge of the network in applications such as smart homes, smart cities, retail, factories, and vehicles.
ARM already offers a chip development platform, which allows customers to create Edge AI devices that can process data in real time. Better yet, the company appears to have gained traction in this market. CEO Rene Haas said of the company's July revenue conference call:
From smart sensors in homes and factories to the world's most advanced AI supercomputers, AI workloads are deployed everywhere. This drives unprecedented demand for energy-efficient computing as well as performance.
Haas claims that ARM provides the “only computing platform” where developers can design chips that can power a wide range of applications. This claim is supported by a diverse market armed at the end of the previous fiscal year.
The company earns 45% of its royalty revenue from smartphone processors. Meanwhile, 37% of loyalty comes from other segments such as the Internet of Things (IoT) and embedded devices, automotive chips, cloud and networking, and other appliance devices. ARM has expanded its presence in these markets over the years as it previously relied on the smartphone business for more than half of its loyalty revenue.
The company now says it is “increasing revenue beyond mobile through its range of products including CPUs and systems for markets such as cloud, automotive, IoT/embedded computing.” The good part is that these markets can be armed for healthy long-term growth.
This is because the size of the Smart Edge AI devices market is expected to grow at 30% annually over the next decade due to improved adoption in automobiles, healthcare and home appliances. ARM's chip designs are already used by things like apple, Samsungand MediaTek It integrates Edge AI capabilities into your flagship smartphone.
Meanwhile, the share of ARM-based PCs is expected to double to 40% from 2029. The company is also targeting the automotive market with its recently launched platform that specializes in the space.
As a result, don't be surprised to see the company's growth accelerate in the long run, as it licenses chip architecture for more devices and establishes a stronger loyalty stream.
ARM's new intellectual property (IPS) commands higher royalties. For example, Computing Subsystems (CSS) that help accelerate AI, cloud computing, and networking chip development to customers is twice the loyalty rate compared to the ARMV9 architecture. ARM says it has already landed five CSS customers, including three new CSS licenses signed in the ongoing quarter.
Another important thing worth noting is that the AI-focused ARMV9 architecture already led twice the royals of previous generation ARMV8s. Therefore, an increase in ARM's CSS traction should drive firm revenue growth for the company. Analysts are hoping to earn $1.69 per share from ARM this year. This is expected to continue to see impressive growth over the next few years.
YCHARTS estimates of ARMEPS for next fiscal year data
Of course, ARMs are trading at expensive 78x advance revenues. But then, the higher adoption of EDGE AI devices and the higher loyalty rates set up by ARM to direct, the more revenues will be increased at a faster pace than the market expects. So growth investors looking to buy AI stocks can consider accumulating arm holdings as they appear to be set up to power next-generation smart devices.
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The harsh Chauhan has no position in any of the stock mentioned. Motley Fool has joined and recommended the Apple and Goldman Sachs Group. Motley Fools have a disclosure policy.
Prediction: This artificial intelligence (AI) company was originally published by Motley Fool, the next era of smart devices
