Amazon, Apple, and Nvidia are among the largest, richest, and most powerful tech companies on Earth.
It's hard to properly emphasize just how much these companies depend on Arm Holdings (ARM +2.50%) for its proprietary instruction set architecture. They literally cannot build chips without Arm licensing, not without walking away from an ecosystem that they've spent years wading deeper into.
It makes Arm an indispensable tech player as artificial intelligence (AI) hits its stride and new technologies, such as humanoid robotics, loom on the horizon. Plus, Arm just announced a game-changing move that could completely alter its business over the next five to 10 years.
Here is why the growth stock could soar over the long term.
Image source: The Motley Fool.
First, the skinny on Arm's big announcement
Language sits at the core of how people interact, and the same is surprisingly true of technology. Arm is the leader in developing instruction set architecture (ISA), which enables computer processors to communicate with and run software.
Central processing units (CPUs) serve as the brains of almost every computer and electronic device. Arm specializes in CPU architecture, and until recently, the company has made money entirely from royalties and licensing fees it charges customers when they build chips with its designs.
But now, Arm is actually entering the same market as its customers. It recently unveiled its first-ever production chip, a CPU designed to manage agentic AI workloads in data centers. Arm's CEO noted that agentic AI has quadrupled CPU demand.
It's always risky to take such a large swing on something new, but clearly Arm felt the opportunity was worth it. Management expects the AGI CPU to enter volume production later this year, and guides for $1 billion in chip revenue by 2028, and $15 billion in 2031.
Why tech's biggest players need Arm
Arm has been careful to label its AGI CPU as additive to the AI market, not a direct competitor to its customers. That doesn't mean that Arm's entry to the chip space won't alienate Amazon, Apple, and Nvidia, all of which license Arm's ISA for their most important chips. That includes:
- The Graviton CPUs Amazon uses for its AWS cloud computing platform
- The Apple silicon processors that run most iOS devices
- The Grace and Vera CPUs Nvidia uses in its data center AI stacks
However, Arm has tremendous leverage here. For example, if Apple developed chips on another ISA, it would cause catastrophic capability issues. Apple would need to redo all of its operating system software for the new ISA, as would Apple's entire third-party developer base. It seems pretty unrealistic given the many devices already circulating.
NASDAQ: ARM
Key Data Points
This is a big problem, but investors can navigate it
Unfortunately, Arm's stock is very expensive; its recent price-to-earnings ratio of 200 can take your breath away for all the wrong reasons. It makes sense that Arm would command a premium valuation, given the company's deep-rooted core business and stellar growth prospects.
But it's a steep price to pay, especially when the AGI CPU won't meaningfully impact the business for another couple of years. As of now, analysts expect earnings to grow by an average of 29% annually over the long term. I suspect those estimates could rise as the market digests the possibilities of Arm's new CPU, but probably not enough to make the stock a bargain at this price.
Arm's stock has been sliding since peaking late last year. Shares jumped on the chip announcement but have since given back some of those gains and could continue to decline if a recently shaky stock market keeps losing steam.
It's impossible to know for certain when Arm may bottom, so consider dollar-cost averaging, buying slowly if the stock does continue to struggle. That way, investors can accumulate shares of this world-class business at better prices and, hopefully, enjoy the stock's soaring success over the years to come.
