This 1 Tech Stock is Worth Buying Hand-Over-Fist, Even in This Environment

Semiconductor stocks and AI stocks are slowing down, even though their financials aren’t. One stock I’m especially hopeful about is Arm Holdings (NASDAQ:ARM), and it’s one I believe is worth accumulating no matter what happens to AI.

This is due to a significant mismatch between several essential tech components. Arm is built to bridge that widening gap, and the company is getting more and more successful by the year as companies fail to address it.

So what is that mismatch?

Over the past two decades, you’ve likely seen multiple generations of software and hardware come and go. But what about the battery that powers everything? That has proven to be a tough nut to crack for the industry, and everything needs to work around that limitation. Lithium-ion should’ve been replaced by something newer and better over a decade ago, but there simply isn’t an answer that can outdo them in both efficiency and capacity.

This mismatch is exactly why Apple (NASDAQ:AAPL | AAPL Price Prediction) ditched Intel (NASDAQ:INTC) chips for its MacBooks and moved into Arm-based M series chips, which “sip” power while allowing solid laptop performance. Apple now pays royalties to Arm for each M-series chip.

More companies are following Apple’s lead

Apple’s MacBooks have become hugely successful in recent years, and even Windows laptops are now starting to switch to ARM.

It’s not just laptops and consumer devices that are migrating, but also data centers. CEO Rene Haas stated that Arm’s share amongst the top hyperscalers was expected to be 50% last year. Plus, EVs are coming into the fray, with Arm continuing to dominate smartphones. Smartphone royalties are surging despite the smartphone industry contracting.

Rivian (NASDAQ:RIVN) announced the first production vehicle based on a custom Arm chip using v9 architecture, and Tesla (NASDAQ:TSLA) Optimus humanoid robot is powered by a custom Arm-based AI processor.

It’s an accelerating trend that could encompass most of the AI and computing industry, as the performance tradeoff for efficiency is worth it for most use cases. For laptops, I expect most, if not all, non-gaming laptops to be based on ARM technology. There’s no rationale to use older architectures that guzzle power.

Arm has an unusually strong moat, and it’s better than you’d expect

This is why I like ARM stock specifically. This company does not manufacture or rely on designing chips like most other semiconductor stocks in the market today. Unlike, say, Nvidia (NASDAQ:NVDA), Arm simply owns the intellectual property (IP) and collects royalties. It does not have to spend on advertising or constantly keeping up with competitors. It owns the architecture that everyone else is building on. Arm’s gross margin is at 97.5%.

It’s set to only improve as the transition from older architectures to newer ones is dramatically increasing what Arm earns per chip. The v8 architecture generated royalties in the range of 2.5% to 3.5% of a chip’s average selling price (ASP), while v9 takes that to roughly 5% of ASP. Arm’s CEO expects the Compute Subsystem (CSS) product to double that again, to approximately 10% of ASP. The pricing escalation is extraordinary, and Wall Street is yet to fully price this in.

Analysts expect revenue growth at a 23% annual clip in the coming years, with EPS growth at 21.5% annually. Even if the stock follows this growth trajectory, you should comfortably outperform the benchmark. I expect even these growth rates to prove to be an underestimate if the broader industry does well. Arm is very lean, so it can also weather a downturn well, as it has $3.54 billion of cash on its balance sheet with just $461 million of debt.

I expect ARM stock to cross $200 within the next 12 months, perhaps reaching even $250 by 2027 as companies keep migrating into its architecture.