Nearly three years into the AI boom, there's no question who the big winner has been.
Nvidia (NVDA +0.77%) has grabbed much of the spoils from the new technology as the chipmaker has seen its market cap jump by roughly $4 trillion. No other company can come close to that claim.
Nvidia has provided the building blocks in its GPUs and superchips to power generative AI tools like ChatGPT, and its technological advantage in the area only seems to have strengthened since OpenAI launched its trademark chatbot.
Whatever happens next in AI, Nvidia is sure to play a major role, especially as the company is ambitious enough to roll out a new platform every two years, but Nvidia has risen to AI dominance through the data center, catering to cloud hyperscalers and generative AI start-ups like OpenAI. However, Nvidia doesn't make chips for the so-called edge, which refers to the devices that people actually interact with, like smartphones, computers, and appliances.
One semiconductor company that serves the edge segment as well as the data center is Arm Holdings (ARM +2.50%), and it looks well positioned to be a leader in the next generation of smart devices.
Image source: Getty Images.
What Arm is doing with AI
Arm is already in the AI race. It has more than a 99% share of the smartphone market thanks to its battery-efficient CPU technology, which is also helping to drive its growth in the data center, where power efficiency is at a premium as well.
Arm has partnered with Nvidia and top cloud infrastructure companies like Microsoft and Alphabet, which license Arm's architecture for some of their chips.
The company, which has traditionally licensed its technology and collected money from royalties and the sales of products with its architecture, is moving to be a stand-alone chip designer, becoming a competitor of customers like Nvidia.
Last month, Arm hired Amazon's AI chip director, Rami Sinno, who led the development of its AI chips Trainium and Inferentia.
Arm has not made a formal announcement, but according to media reports, the company is preparing to design and sell its own chips, securing Meta Platforms as one of its first customers for a new data center chip.
In addition to the move into chip design, Arm has also advanced its licensing, moving from CPUs to a more complete package called a system-on-chip (SoC), which makes it easier and faster for its customers to move from the design phase to manufacturing those chips.
NASDAQ: ARM
Key Data Points
Why Arm looks like a winner
Arm already designs the core technology for most smart devices, and it looks poised to be a leader in Edge AI, meaning devices that perform AI on their own, carrying out AI functions without needing to be connected to the internet.
Given its technological advantage in battery efficiency, Arm looks well positioned to dominate the market for Edge AI because it will have the same need for power efficiency that existing smartphones and AI applications have. The company is already making platforms designed for Edge AI, like the Arm Corstone platform for Internet of Things (IoT), and it has another for machine learning in edge devices.
It could take a few years for Edge AI devices to go mainstream, but the market for these smart devices is likely to be huge and could even outgrow the cloud AI market eventually.
No chip stock is better positioned to capitalize on this transition than Arm, and its moves into chip design and SoC licensing should accelerate its growth as Edge AI develops.
The stock is expensive, but it's high-priced for a reason. Arm has a wide economic moat thanks to its low-power architecture, and its business model generates wide margins. As the opportunity in front of it expands, Arm is poised to be a winner from the next generation of smart devices.
