Apple‘s much-awaited Sept. 9 event is finally in the rearview mirror, and it would be safe to say that there was nothing much to be surprised about. The technology giant revealed a new generation of iPhones that will support generative artificial intelligence (AI).

The new iPhone 16 lineup will get its first batch of generative AI features next month through a software update. It appears that the company will be gradually introducing AI tools from its Apple Intelligence suite of generative AI features as it looks to make a dent in an emerging smartphone niche that’s expected to take off big-time in the long run.

Market research firm IDC is forecasting a 364% year-over-year increase in shipments of generative AI smartphones this year to 234 million units. More importantly, the generative AI smartphone market is forecast to grow at an annual rate of 78% through 2028, clocking annual shipments of 912 million units as per IDC.

So, Apple is moving into the generative AI smartphone market at an opportune time when the demand for these devices is booming. That explains why Wedbush analyst Dan Ives expects Apple’s latest iPhones to kick off a solid upgrade cycle, with shipments expected to increase in the double digits in 2024 compared to last year’s near-4% increase in shipments. The company is expected to ship 240 million iPhones in fiscal 2025 thanks to the growing adoption of AI smartphones.

Now, it remains to be seen if the AI-enabled iPhones are good enough to give Apple’s top and bottom lines a nice boost. However, there’s one company that could be a bigger beneficiary of Apple’s iPhone 16 launch than the Cupertino-based tech giant itself — Arm Holdings (NASDAQ: ARM). Let’s look at the reasons why.

iPhone 16 lineup could boost Arm Holdings’ revenue and margins

Apple points out that its latest smartphones are “built for Apple Intelligence.” To make that happen, the company developed a new smartphone chip — the A18. The iPhone 16 and the iPhone 16 Plus will be powered by the A18 chip, while the Pro and Pro Max versions will have the A18 Pro chip inside them.

Apple has reportedly designed this chip using Arm Holdings’ Armv9 architecture, according to the Financial Times. Announced in 2021, the Armv9 architecture places emphasis on AI, security, and performance upgrades over the previous generation Armv8 architecture that was launched in 2011. So, it is not surprising to see Apple has reportedly decided to opt for this architecture to develop its latest iPhone processors so that they can support AI functions.

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For comparison, Apple was using the Armv8 architecture until last year when it launched the iPhone 15 models. While the transition to Armv9 could be good news for iPhone users as they will be able to finally use AI features, apart from witnessing a potential jump in performance, it could be even better news for Arm investors.

That’s because Armv9 “commands a higher royalty per chip than prior architectures,” as pointed out by management in a recent earnings presentation. Arm CEO Rene Haas has said that the royalties from the Armv9 architecture could be double that of its predecessor, the Armv8. A closer look at the management commentary on Arm’s July earnings conference call indeed suggests that Armv9 is driving the needle in a bigger way for the company.

In the words of Haas:

Clearly, the adoption of Armv9 has led to a much stronger increase in Arm’s revenue against the number of units that the company has been shipping. As a result, the company’s total revenue shot up an impressive 39% year over year in the first quarter of fiscal 2025 to $939 million. More importantly, Arm’s remaining performance obligations also increased 29% from 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 jump following the release of its latest lineup, it won’t be surprising to see Arm’s royalty revenue also go up substantially thanks to Armv9. The important thing to note here is that even if Apple doesn’t witness a meaningful increase in shipments on the back of the iPhone 16 launch, Arm Holdings would still remain a winner because of the potentially higher royalties it is set to receive from Cupertino.

Bigger royalties could translate into terrific earnings growth

Apple isn’t the only smartphone stakeholder to have switched to the Armv9 architecture. Leading smartphone processor company Qualcomm has already been using this architecture, as has Chinese chip giant MediaTek. So, Arm Holdings is well positioned to make the most of the booming demand for generative AI smartphones, and the growing demand for the Armv9 architecture will allow the company to generate fatter margins because of stronger royalties.

This probably explains why analysts are forecasting an acceleration in Arm’s bottom-line growth. The company ended fiscal 2024 with $1.27 per share in earnings, which means that its bottom line could jump 23% in the current fiscal year to $1.57 per share as per consensus estimates. The earnings estimate of $2.07 per share for the next fiscal year indicates that Arm’s earnings could increase at a much healthier pace of 32%, which is why investors looking to benefit from Apple’s latest iPhones in particular and AI smartphones in general can consider buying Arm Holdings as its long-term prospects appear to be solid.

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

Prediction: This Tech Stock Could Take Off After the iPhone 16 Launch (Hint: It’s Not Apple) was originally published by The Motley Fool