Who's the biggest winner from Apple Intelligence? It's this AI stock, not Apple.

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 lineup, the launch of its first new phone since the introduction of Apple Intelligence in June.

The latest series of phones will be fully compatible with the new generative AI features planned to be introduced with iOS 18. Apple's launch of the new phones and Apple Intelligence will potentially be the biggest test yet of the demand for generative AI technology.

Cloud infrastructure companies and startups have invested billions of dollars in AI infrastructure and purchased NVIDIA Components and filling data centers to build and run generative AI applications like ChatGPT, but so far there has been no significant business beyond the increased demand for hardware components.

There isn't really a “killer app” based on generative AI, and generative AI-based software hasn't caught on as much as some might have expected when ChatGPT launched nearly two years ago. However, Apple has a better chance of changing that than any other company before it, as Apple Intelligence will come with generative AI writing tools like text rewriting, image generation, and visual intelligence that will help users glean information from just a photo.

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

However, Apple shares did not receive the boost from the news that some might have expected and closed essentially unchanged on Monday.

An AI stock that emerged as a winner

While Apple shares stagnated following this news, an important supplier rose sharply. Arm Holdings (ARM -0.81%)which develops Apple's CPU architecture, saw a sharp rise after the presentation, ending Monday's session up 7%.

Importantly, Apple's new A18, used in the iPhone 16, runs on Arm's latest CPU architecture, the v9, which brings in 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 will benefit from strong sales of the iPhone 16, but according to these numbers, Arm is likely to benefit even more if the new iPhones are a success.

If iPhone 16 unit sales increase by 10% over the iPhone 15, Arm's iPhone royalties would increase by 120%, as royalties would have doubled year-over-year. If iPhone sales account for half of the company's royalty revenue, that alone would increase royalty revenue by 60%, even if the rest of the business is flat.

Another way arm wins

Arm dominates the smartphone CPU architecture market with over 99% market share. This is mainly due to its energy-efficient architecture, which helps extend battery life. But the company also sees increasing opportunities in the data center due to the AI ​​boom, as its Grace CPUs are also 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 This also applies to data centers, as AI applications require enormous amounts of energy and running them as efficiently as possible helps companies save money. Applied materials CEO Gary Dickerson recently said, “In our conversations with leading AI companies, they tell us that reducing power consumption per operation is now more important than increasing operations per second.”

If Apple Intelligence takes off and creates a larger market for AI devices, it could trigger a supercycle of 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% last quarter. If the iPhone 16 takes off, Arm will likely benefit, and the stock has a lot of upside potential in the AI ​​space, too.