Data centers are becoming the world’s computers. This isn’t new. Corporations have been transferring workloads to the cloud for a decade. The disruptive innovation is artificial intelligence (AI). One company poised to benefit is Arm Holdings (ARM), maintains Jon Markman, editor of Disruptors & Dominators.
AI replicates the human brain. Algorithms teach cloud-based computing systems to learn and think like a human…using massive parallel simulations. Many companies have made incredible breakthroughs using AI — from biology and drug discovery to material sciences.
AI is certain to change the world in truly profound new ways. The problem is these advancements require massive amounts of energy to power next-generation AI computers. Getting these computers to run more efficiently is a big secular trend.
Arm Holdings (ARM)
Oddly, this space is being dominated by a pair of relatively small disruptive businesses. A single company controls technology that is foundational to everything from smartphones and supercomputers to the safety systems in modern vehicles. That company is ARM, a British designer of semiconductor architectures.
ARM was founded in 1990 as Advanced RISC Machines, a joint venture between Apple (AAPL), VLSI Technology, and Acorn Computers. The project was originally supposed to supply central processing units, or CPUs, to the Apple Newton computer, a handheld personal digital assistant. Newton failed.
The opposite was true for Arm and its revolutionary CPUs. The innovation of the Arm CPU was its low cost of production, relatively low heat generation, and miniscule power consumption. These factors alone made the chip design a winner.
However, executives had another big innovation. They decided not to produce the chips at all. Rather, Arm would license the intellectual property to its unique “System on a Chip,” or SoC, architecture. Any firm that purchased the IP license became free to use the design.
Arm SoCs became an immediate success. The business was profitable in only three years. Today, Apple, Samsung (SSNLF) and Qualcomm (QCOM) license Arm IP for the CPUs used in smartphones, tablets, watches, and wireless modems, among other applications.
NXP Semiconductors (NXPI) licenses Arm tech for the microcontrollers that are the brain for automatic braking systems on cars and trucks. And Japanese supercomputer maker Fugaku used Arm architecture to build the world’s fastest computer through the first half of 2022.
The use cases for Arm IP are varied and extensive. Executives at Arm noted in 2022 that its IP powers 99% of the world’s smartphones. Through the end of 2023, a staggering 270 billion Arm-based chips had been sold. And with more than 1,000 technology partners on board, Arm IP is inside of everything from the tiniest low power sensors to complex satellite systems.
Recommended Action: Buy ARM.
