Amazon Just Delivered Great News for This Top AI Stock
Key Points
Amazon is seeing explosive demand for its Arm-based Graviton chips.
Arm said its data center royalty revenue doubled over the past year.
Increasing demand for AI compute should make Arm a winner.
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Amazon (NASDAQ: AMZN) stock fell on its fourth-quarter earnings report as investors balked at its plans to spend $200 billion on capital expenditures, but there was some good news in the report as well.
One of the brightest spots for Amazon was the growth of its custom chips, Graviton and Trainium, which reached a run rate of more than $10 billion in annual revenue and is more than doubling on a year-over-year basis. If it was a stand-alone business, it might be worth $100 billion now.
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That's good news not just for Amazon, but also for Arm Holdings (NASDAQ: ARM), which designs the CPUs used in Graviton. Arm sells a license to use the "instruction set" for the CPU and then collects a royalty when it is sold or put into use.
Image source: Getty Images.
Graviton is taking off
In addition to the rapid growth and the run rate above, Amazon CEO Andy Jassy noted that the company is "adding significant EC2 core computing capacity each day," referring to a core service of Amazon Web Services, its cloud infrastructure business, and that a majority of that is using Graviton.
Jassy also noted that Graviton's price performance is more than 40% per instance than comparable x86 processors, a competitor to Arm made by Intel and AMD.
The success of Graviton is clearly a win for Amazon, but it might be a bigger driver of Arm's growth as that company is bringing in a little more than $1 billion in revenue per quarter.
The better performance of Graviton over x86 alternatives is likely to encourage more spending on Arm CPUs for the cloud, and Arm management said its data center royalty revenue doubled in its most recent quarter. It believes that data center revenue could overtake smartphone revenue as its biggest category in the next three years.
What it means for Arm
In an interview with The Motley Fool, CFO Jason Child said that most Graviton CPUs now run on Arm and that the company would benefit from the growth of AI agents, which will demand more CPUs, driving up its royalty collections. Additionally, new versions of Graviton, like the Graviton 5, have more cores, meaning more CPUs. Newer chips are also using a more advanced Arm design, known as compute subsystems (CSS), which charges a significantly higher royalty rate.
As demand for Graviton and related cloud AI chips grows, Arm is well-positioned to benefit, making it an overlooked winner in the AI boom.
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Jeremy Bowman has positions in Advanced Micro Devices, Amazon, and Arm Holdings. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, and Intel. The Motley Fool has a disclosure policy.
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