Key Points

Robotaxis are expanding across the U.S., with Waymo leading the charge.
Autonomous vehicles and robotics could form a multi-trillion-dollar sector.
Arm Holdings has secured major market share via its energy-efficient CPUs.

For almost ten years, tech leaders and industry giants have forecasted the mainstream arrival of self-driving cars.

Tesla (NASDAQ: TSLA) CEO Elon Musk has promoted his robotaxi network vision for over a decade, though progress has been modest.

Yet the vision of autonomous vehicles is inching toward reality. Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Waymo, the sector frontrunner, now delivers 500,000 fully driverless rides weekly across 11 cities. Tesla has launched a limited robotaxi service in Austin, Dallas, Houston, and the Bay Area, with plans for swift growth.

Should robotaxis achieve widespread adoption, they could generate trillions in value, reshaping transportation entirely.

Tesla and Alphabet stand out as primary players, but they may not offer the optimal investment angle - partly due to their massive scale, where even explosive robotaxi growth might barely impact their overall results.

One chipmaker, however, is primed to benefit from robotaxi expansion and the anticipated robotics surge: Arm Holdings (NASDAQ: ARM). Renowned for power-efficient CPUs, Arm is favored in autonomous vehicles and robotic systems.

Image source: Getty Images.

Arm's Push into Physical AI

Most semiconductor efforts target data-center chips fueling AI models from firms like OpenAI and Anthropic, creating a booming market.

Physical AI - AI integrated into devices such as self-driving cars and robots - holds equal promise. Reports from January indicate Arm restructured to form a dedicated Physical AI division, one of its three core business units.

In discussions with industry analysts, Arm CFO Jason Child highlighted the firm's robotics and physical AI prospects.

Child noted Arm's solid foothold with electric vehicle producers; Tesla and Musk's ventures all rely on Arm-based chips. He pegged Arm's CPU market share in automotive and robotics at around 80%, appearing in robots from Tesla, Boston Dynamics, and Chinese firms. Arm powers Nvidia's Jetson Thor, a top robotics chip.

Forecasting robotics growth proves challenging amid its slower pace versus generative AI, with Child suggesting major advances might lie "five to 10 years" ahead.

Implications for Arm

Arm's stock seems underappreciated by investors, often volatile post-earnings as markets grapple with results, forecasts, and executive insights.

Arm's semiconductor model is distinctive: it licenses CPU designs and earns ongoing royalties, yielding enduring revenue. This elevates its valuation, with a current price-to-sales ratio near 46 versus peers.

Such a premium appears warranted, given Arm's debut custom chip, the Arm AGI CPU, set to boost revenues sharply, alongside its Physical AI prospects in robotaxis and beyond.

Though these areas remain nascent for valuation purposes, they underscore Arm's enduring growth runway, justifying the investment.

Robotaxis may require years to dominate, but Arm stands ready to capture substantial gains if they succeed.