Bullish on Robotaxis? This Is the Stock To Buy (Hint: It's Not Tesla or Alphabet)

For nearly a decade, technologists and business titans have predicted that self-driving cars are on the verge of going mainstream.

Tesla (NASDAQ: TSLA) CEO Elon Musk has been talking up his vision of a robotaxi network for more than a decade, despite relatively little to show for it.

However, it now seems that the dream of self-driving cars is coming closer to reality. Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Waymo, the industry leader, is now performing 500,000 fully autonomous rides per week in 11 cities. Tesla has begun offering a small-scale robotaxi network in Austin, Dallas, Houston, and the Bay Area, and has ambitions of rapidly expanding it.

If robotaxis go mainstream, they could be a trillion-dollar industry as they threaten to upend the entire transportation industry.

Tesla and Alphabet are the most obvious names in the space, but they're not the best choice to get exposure, in part because they are already huge companies, and Waymo or Tesla's robotaxis would have to grow exponentially to move the needle for their parent companies.

However, there's one chip stock that's well-positioned to capitalize on the growth of robotaxis and the expected boom in robotics. That's Arm Holdings (NASDAQ: ARM), best known for its power-efficient CPUs, which make it a preferred choice in technologies such as autonomous vehicles and robots.

Image source: Getty Images.

What Arm is doing with Physical AI

The vast majority of the semiconductor industry is focused on data-center chips, which are powering AI models from OpenAI and Anthropic, and that business has become huge.

However, Physical AI, or AI in products like autonomous robots and cars, could be just as big. Reuters reported in January that the company reorganized to create a Physical AI unit, one of three main lines of business.

In an interview with The Motley Fool, CFO Jason Child addressed the company's potential in robotics and physical AI.

Child said Arm has a strong position with electric vehicle makers, and Tesla, along with all of Elon Musk's companies, uses Arm-based chips. He also estimated that the company has an 80% market share in CPUs for automotive and robotics, noting that Arm is in robots made by Tesla, Boston Dynamics, and Chinese manufacturers. Arm is also in Nvidia's Jetson Thor, which is considered the leading robotics chip.

Predicting the ramp of the robotics industry is more difficult, given its relatively slow progress compared to AI, and Child estimated that significant growth in the category was "probably five or 10 years away."

Why it matters for Arm

Arm stock appears misunderstood by the market, and it often swings up and down after earnings reports, as investors are unsure how to weigh results against guidance and management commentary.

Arm has a unique business model in semiconductors as it licenses its CPU architecture and collects royalties on it, and royalty 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 valuation seems justified when you consider that the company is launching its own chip for the first time, the Arm AGI CPU, which will significantly accelerate its revenue growth, and its opportunity in Physical AI, including robotaxis and robotics.

While those categories are likely too small and unpredictable to factor into valuation models for Arm, they show the stock's long-term growth potential, which is worth paying up for.

It may take years for robotaxis to go mainstream, but if they do, Arm is poised to reap the benefits.

Jeremy Bowman has positions in Arm Holdings and Nvidia. The Motley Fool has positions in and recommends Alphabet, Nvidia, and Tesla. The Motley Fool has a disclosure policy.