UBS Initiates Coverage on Arm Holdings with 'Buy' Rating, Citing AI-Driven Growth Potential

Is AI Stock Arm Holdings Going to $160? 1 Wall Street Analyst Thinks So. | The Motley Fool

The artificial intelligence (AI) stock craze, although it's moderated some in recent times, is a long-tail trend that began around two years ago. Many investors are understandably convinced that the technology is going to be ubiquitous before long, and they're still scrambling to find investments that might take good advantage of this trend. One of the more durable AI stock plays, U.K.-based ARM Holdings (ARM 0.69%), saw another professional researcher recently join the crowd of bulls tracking it. He thinks the company is worthy of a buy, and here's why. On Monday, storied Swiss bank UBS Group initiated coverage of Arm's stock. Analyst Timothy Arcuri flagged the highly specialized AI stock as a buy, with a price target of $160 per share. That's 17% higher than the stock's most recent closing price. Arm has a somewhat atypical revenue model -- it focuses on drawing licensing and royalty fees from processor technology it sells to clients. In his inaugural research note on the company, according to reports, Arcuri wrote that AI is powering growth in all of Arm's end markets, particularly the data center segment. This robust growth should even extend into smartphones, even though it's a business in which Arm already has significant penetration. Arcuri has forecast a compound annual growth rate (CAGR) of 23% from 2023 to 2025 alone. Arm is one of the stocks best-positioned to exploit the vast opportunities offered by AI -- and across multiple tech segments, at that. The UBS pundit accurately opined that the company is quite expensive based on its valuations, but stocks with immense potential tend to be that way. I think this stock is undoubtedly a buy. I'd go further to say it might be the best AI play right now.

UBS says this AI play is a buy with nearly 20% upside ahead

UBS is getting bullish on Arm as the artificial intelligence boom continues. The investment bank initiated coverage on the chipmaker with a buy rating and set its price target at $160, which implies about 17.7% upside from Friday's close. "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 [central processing unit] architectures (a core strength of ARM's offering)," analyst Timothy Arcuri told clients in a note. "Even in smartphone (~50% of revenue) 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," the analyst continued. In addition to growth in the smartphone market, Arcuri sees the AI megatrend spurring expansion in PCs and data centers for Arm. For PCs, he thinks Arm will expand its market share from 17% in 2023 to 22% in 2028, leading the company's annual PC royalties to more than double to more than $300 million. Arm's data center share should expand even faster, Arcuri said. Specifically, he forecasts that the company's market share in that space will more than triple from less than 5% in 2023 to the mid-teens in 2028. Moreover, the analyst thinks the chip designer will likely sustain its intensity in research and development in the 30% range, noting the productivity of its R & D as a "key strength." "Arm's three decade track record of R & D productivity shows that the R & D investments it is making today will underlie the next decade's stream of high-margin revenue," Arcuri said. ARM YTD mountain ARM, year-to-date The stock moved about 2% higher in the premarket following the move. This year, shares have rallied meaningfully, advancing about 81%.

UBS initiates Arm Holdings with 'buy', $160 PT By Investing.com

Investing.com -- UBS analysts have initiated coverage of Arm Holdings (NASDAQ:ARM)with a "buy" rating, setting a price target of $160 per share, which suggests a 20% upside from its current trading price. The analysts flag Arm's positioning to benefit from key growth trends, particularly in artificial intelligence applications across its major markets, including data centers and personal computing. UBS underscores that while the smartphone segment, which constitutes around half of Arm's revenue, remains a mature market, Arm is well-placed to outpace overall industry growth through increased royalty rates and the growing importance of processors in device costs. The analysts project a compounded annual growth rate of 23% in smartphone royalties from 2023 to 2025. In personal computing, UBS foresees Arm increasing its market share from 17% of PC units in 2023 to 22% by 2028, driven by collaborations with companies like Qualcomm (NASDAQ:QCOM) and Nvidia (NASDAQ:NVDA). This segment is expected to witness a 15% royalty CAGR. Meanwhile, the data center market is poised for even more rapid growth, with Arm's server market share projected to rise from 5% of unit share in 2023 to 16% by 2028. This growth is boosted by hyperscalers such as Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOGL), and Microsoft (NASDAQ:MSFT) increasingly adopting Arm-based architectures for efficiency and performance. UBS also flags Arm's strong R&D investments, which are expected to remain around 35% of revenue. The company has a proven track record of generating enduring royalty streams from its research, with older products still contributing substantially to revenue. Despite a valuation that UBS describes as "rich," the brokerage justifies its optimism through Arm's growth potential and compares its price-to-earnings growth ratio favorably with industry peers. Risks outlined include geopolitical tensions, competition from x86 and RISC-V architectures, and challenges related to Arm China. Shares of the semiconductor company was up 1.1% in pre-open trade.