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

AppleThe long-awaited September 9 event has finally fallen by the wayside, and it’s safe to say there was nothing surprising about it. The tech giant revealed a new generation of iPhones that will feature generative artificial intelligence (AI).

The new iPhone 16 lineup will receive the first batch of generative AI features next month via a software update. The company appears to be gradually rolling out AI tools from Apple Intelligence’s suite of generative AI features as it looks to carve out a dent in an emerging smartphone niche that’s expected to grow over the long term.

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

Apple is therefore entering the generative AI smartphone market at an opportune time, when demand for these devices is surging. That explains why Wedbush analyst Dan Ives expects Apple’s latest iPhones to embark on a solid update cycle, with shipments set to grow by double digits in 2024, compared to nearly 4% shipment growth last year. The company is expected to ship 240 million iPhones in fiscal 2025, thanks to the growing adoption of AI smartphones.

The question now is whether AI-powered iPhones are good enough to give Apple a solid injection of cash and profits. There is one company, however, that could benefit more from Apple’s iPhone 16 launch than the Cupertino tech giant itself — Arm Holdings (NASDAQ:ARM)Let’s look at the reasons.

iPhone 16 Offering Could Boost Arm Holdings’ Revenue, Margins

Apple emphasizes that its latest smartphones are “built for Apple Intelligence.” To achieve 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 reportedly designed the chip using Arm Holdings’ Armv9 architecture Financial TimesAnnounced in 2021, the Armv9 architecture emphasizes AI, security, and performance improvements over the previous-generation Armv8 architecture that was launched in 2011. It’s no surprise then that Apple has reportedly opted for this architecture to develop its latest iPhone processors so they can support AI features.

For comparison, Apple used the Armv8 architecture until last year when it released the iPhone 15 models. While the move to Armv9 could be good news for iPhone users as they will finally be able to use AI features, in addition to the potential performance jump, it could be even better news for Arm investors.

That’s because Armv9 “collects higher per-chip royalties than previous architectures,” as management indicated in a recent earnings presentation. Arm CEO Rene Haas said that the Armv9 architecture could see royalties double those of its predecessor, Armv8. A closer look at management’s commentary on Arm’s July earnings call does suggest that Armv9 is a bigger driver for the company.

As Haas said:

It’s clear that the adoption of Armv9 has led to significantly higher revenue growth for Arm compared to the number of units the company has been shipping. As a result, the company’s total revenue grew an impressive 39% year-over-year in the first quarter of fiscal 2025 to $939 million. More importantly, Arm’s remaining performance commitments also increased by 29% compared to the same quarter last 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 following the launch of the latest series, it wouldn’t be surprising if Arm’s royalty revenue also increased significantly thanks to Armv9. It’s important to note that even if Apple doesn’t see a significant increase in shipments following the launch of the iPhone 16, Arm Holdings will still remain a winner due to the potentially higher royalties it will receive from Cupertino.

Higher royalties could translate into huge profit increases

Apple is not the only smartphone stakeholder to move to the Armv9 architecture. Leading smartphone processor company Qualcomm already uses this architecture, as does Chinese chip giant MediaTek. Arm Holdings is therefore 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 thanks to higher licensing fees.

This likely explains why analysts are forecasting an acceleration in Arm’s net earnings growth. The company ended fiscal 2024 with earnings per share of $1.27, meaning its net earnings could increase 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 suggests Arm’s earnings could grow at a much healthier pace of 32%, so investors looking to take advantage of Apple’s latest iPhones in particular and AI smartphones in general could consider buying Arm Holdings, as its long-term prospects appear solid.

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