Arm Holdings (ARM) saw its stock rise over 4% in premarket trading on Friday after HSBC upgraded its rating from Reduce to Buy, significantly increasing its price target from $90 to $205. This bold move reflects HSBC’s belief that Arm’s transition from a smartphone-focused intellectual property (IP) company to a key player in the artificial intelligence (AI) server CPU market is currently undervalued by investors.
HSBC analyst Frank Lee emphasized this transition, stating, “We believe Arm is now firmly in the middle of a transition from being a smartphone dependent semi-IP play, into a major AI server CPU beneficiary that remains undervalued by the market.” This upgrade aligns with the growing demand for server chips driven by advancements in AI technology, suggesting that Arm’s market potential extends far beyond its traditional smartphone licensing business.
The bank forecasts that industry CPU shipments will increase by 20% in 2026 and 21% in 2027, marking a significant uptick from an average growth rate of just 2% between 2021 and 2025. Major hyperscalers, including large cloud providers, are increasingly adopting Arm-based server CPUs and migrating to the company’s more advanced v9 architecture, which allows for higher royalty earnings per chip.
As designs for server CPUs incorporate more cores, Arm stands to benefit further, with increased royalties flowing from more complex chip designs. HSBC projects that Arm’s royalty revenue from server CPUs could grow at a remarkable compound annual growth rate of 76% between fiscal 2026 and fiscal 2031. By fiscal 2031, this segment is expected to generate approximately $4 billion, nearly matching the company’s projected total revenue of $4.9 billion in fiscal 2026.
Lee remarked on the potential of server CPU royalties, stating that they “could be as big as the current overall company revenue by 2030.” In light of these revised expectations, HSBC has raised its earnings estimates for fiscal 2027 and 2028 by 2% and 9%, respectively.
One of the most intriguing aspects of HSBC’s analysis is the suggestion that Arm may be venturing into the development of its own merchant CPU, transitioning from its traditional licensing model to direct chip sales. The bank noted a substantial increase in Arm’s research and development spending, indicating that the company may be taking steps to bring a proprietary CPU to market. If successful, this shift could significantly alter Arm’s revenue dynamics, with revenue per chip potentially soaring from current royalties of approximately $36 to $132, to an estimated selling price of around $1,000 per unit.
HSBC hinted that further details regarding Arm’s strategic direction may be unveiled at the upcoming “Arm Everywhere” event scheduled for March 24, where the company is likely to provide additional insights into its plans for the future.
In summary, the upgrade from HSBC underscores a broader shift in the semiconductor landscape as Arm seeks to capitalize on the growing demand for AI-driven processing power. With the potential for substantial revenue growth from server CPUs and a possible foray into merchant chip sales, Arm Holdings appears well-positioned to navigate the evolving technological ecosystem. As the market anticipates these developments, ARM stock has already responded positively, rising about 5.5% during Friday morning trading.
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