Arm Holdings PLC (NASDAQ:ARM) is a strong growth opportunity fueled by AI expansion, UBS analysts believe.
The company’s growing market share in PCs and data centers and durable returns on R&D investments has earned it a ‘Buy’ rating in initial coverage from the investment bank.
UBS set a $160 price target on Arm shares, which implies a 20% upside from current levels.
"AI is driving positive growth vectors across all of ARM's key end markets, with data center particularly fertile ground as the customer base for its IP licenses expands and cloud customers push for more power-optimized CPU architectures—a core strength of ARM's offering," UBS wrote in a note.
While smartphones represent about 50% of Arm's revenue, UBS sees continued growth in the segment. "Even in smartphone, where ARM's penetration is already very high, it should still outgrow the market as royalty rates move higher and the processor grows as a portion of phone cost," analysts added.
UBS emphasized Arm’s "beachheads established in PC and data center," predicting significant acceleration in both markets. UBS projects that AI PC initiatives by Qualcomm and MediaTek/Nvidia will boost Arm's PC unit and revenue shares to 22% and 24% by 2028, driving a 15% annual growth in PC royalties.
UBS acknowledged that Arm's valuation appears steep but justified it with growth potential. "Valuation looks rich, but the market wants growth and we can still see upside here to our $160 PT," analysts wrote.
Key risks include geopolitical challenges, particularly related to Arm China, competition from x86 and RISC-V architectures, and issues with controlling shareholders.
With AI adoption accelerating across industries, UBS views Arm as well-positioned for growth despite its high valuation. "The market wants growth, and Arm has the vectors in place to deliver," UBS concluded.
Shares of Arm were trading around 1.9% higher on Monday afternoon at around $138.62.