For nearly a decade, technology experts and business leaders have been predicting that self-driving cars will take over.
Tesla (NASDAQ: TSLA) CEO Elon Musk has been talking about his robotaxi network vision for more than a decade, despite having little to show for it.
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However, now it seems that the dream of self-driving cars is about to come true. Letters of the alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) Waymo, the industry leader, now provides 500,000 autonomous rides per week in 11 cities. Tesla has begun providing a small robot network in Austin, Dallas, Houston, and the Bay Area, and has ambitions to expand it quickly.
If robotaxis takes off, it could become a multi-billion dollar industry as it threatens to upend the entire transportation industry.
Tesla and Alphabet are the most obvious names in the space, but they are not the best option to gain exposure, in part because they are already large companies, and the robotaxis of Waymo or Tesla will have to grow further to move the needle of their parent companies.
However, there is one chip stock that is well positioned to benefit from the growth of robotaxis and the expected boom in robotics. That’s it Arm Holdings (NASDAQ: ARM)known for its energy-efficient CPUs, making it the preferred choice for technologies such as autonomous vehicles and robotics.
What Arm is doing with Physical AI
Much of the semiconductor industry is focused on data center chips, which power AI models from OpenAI and Anthropic, and that business is already big.
However, Physical AI, or AI in products like autonomous robots and cars, could be just as big. Reuters reported in January that the company had restructured its Physical AI unit, one of its three main lines of business.
In an interview with The Motley Fool, CFO Jason Child talked about the company’s capabilities in robotics and body AI.
Child said Arm has a strong position among electric car makers, and Tesla, along with all of Elon Musk’s companies, use Arm chips. He also estimated that the company has an 80% market share in CPUs for cars and robots, noting that Arm is in robots made by Tesla, Boston Dynamics, and Chinese manufacturers. The arm is also in Nvidia’s The Jetson Thor, considered the best robotics chip.
Predicting the ramp of the robotics industry is very difficult, given its slow progress compared to AI, and Child estimates that significant growth in the category “was probably five or 10 years away.”
Why is it important for Arm
Weapons stocks seem to be misunderstood by the market, and often go up and down after earnings reports, as investors are unsure how to measure results against guidance and management commentary.
Arm has a different business model from semiconductors as it supplies its own CPU architecture and collects royalties on it, and revenue streams tend to have a long tail. That model also makes the stock more expensive than its peers, as Arm currently trades at a price-to-sales ratio of 46.
However, that estimate seems justified when you consider that the company is launching its own chip for the first time, the Arm AGI CPU, which will greatly accelerate its revenue growth, as well as its opportunity in Physical AI, including robotaxis and robotics.
While those categories are too small and unpredictable to factor into Arm’s valuation models, they show the stock’s long-term growth potential, which is worth paying for.
It may take years for robotaxis to go mainstream, but when it does, Arm is poised to reap the benefits.
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Jeremy Bowman has positions in Arm Holdings and Nvidia. The Motley Fool has positions and recommends Alphabet, Nvidia, and Tesla. The Motley Fool has a policy of disclosure.
Bullish on Robotaxis? This Stock You Should Buy (Hint: It’s Not Tesla or Alphabet) was originally published by The Motley Fool.
