Apple (AAPL 0.05%) unveiled the latest steps in its artificial intelligence (AI) strategy on Monday with its “Glowtime” event, which focused on the iPhone 16 series, the first new phone launch since Apple introduced Intelligence in June.

The latest line of phones will all be compatible with new generative AI features, which are expected to launch with iOS 18. Apple’s rollout of the new phones and Apple Intelligence will perhaps be the biggest test of demand for generative AI technology yet.

Cloud infrastructure companies and startups have invested billions of dollars in AI infrastructure and have Nvidia components and filling data centers to create and run generative AI applications like ChatGPT. But so far, no significant trade has emerged, apart from the increased demand for hardware components.

There isn’t really a “killer app” based on generative AI, and generative AI-based software hasn’t taken off like some might have expected when ChatGPT launched nearly two years ago. However, Apple has a better chance of changing that than any company that’s come before it, as Apple Intelligence will come with generative AI writing tools like text rewriting, image generation, and Visual Intelligence, which lets users extract information from a photo.

In other words, demand for the next generation of iPhones will be the biggest test yet of the broader demand for generative AI and its marketability.

Still, Apple stock didn’t get the boost some had expected from the news, ending Monday nearly flat.

Image source: Getty Images.

One AI stock that came out on top

While Apple shares remained stable on the news, the price of a key supplier rose. Arm Holdings (ARM -0.81%)which designs Apple’s CPU architecture, surged during its presentation, closing Monday’s session up 7%.

Importantly, Apple’s new A18, which powers the iPhone 16, will run on Arm’s latest CPU architecture, the v9, which yields twice the royalties of the previous version, the v8.

Apple is also Arm’s most valuable customer, as the iPhone accounts for about half of the company’s revenue.

Of course, Apple benefits from the good sales figures of the iPhone 16, but according to these figures, Arm benefits even more if the new iPhones are a success.

If iPhone 16 units increase 10% compared to the iPhone 15, Arm’s royalties from the iPhone would increase by 120% as royalty rates will have doubled from a year ago. If iPhone sales make up half of the company’s royalty revenue, that alone would increase royalty revenue by 60%, even holding the rest of the business constant.

Another way Arm wins

Arm dominates the smartphone CPU architecture market with over 99% market share. That’s largely due to its power-efficient architecture, which helps preserve battery life, but the company also sees an increasing opportunity in the data center amid the AI ​​boom, with its Grace CPUs also being used by Nvidia in the Grace Hopper and upcoming Grace Blackwell Superchips.

Arm has the same advantage over x86-based competitors such as Intel And AMD also applies to the data center, as AI applications require enormous amounts of energy and companies can save money by running them as efficiently as possible. In fact, Applied materials CEO Gary Dickerson recently said, “In our conversations with leading AI companies, they tell us that reducing power per operation is now more important than increasing operations per second.”

If Apple Intelligence takes off and it turns out there’s a larger market for AI devices, it could spark massive demand for Arm components in smartphones, data centers, PCs, and more.

Arm’s momentum is already building, with licensing revenue, a precursor to royalties, up 72% in the most recent quarter. If the iPhone 16 takes off, Arm looks set to cash out, and the stock has a lot of upside potential in AI beyond that.