UBS bullish on Arm, predicts 20% upside amid AI boom

In the context of a booming artificial intelligence sector, UBS, an investment bank based in Switzerland, expressed a bullish outlook on Arm, a chip designer, by initiating coverage with a buy rating and establishing a price target of $160. This target suggests there is approximately 17.7% upside potential from Arm's stock price as of the close before the announcement was made. The bank's analyst, Timothy Arcuri, noted in a recent client note that the AI sector is creating significant positive growth vectors for Arm's key markets, particularly in the data center and smartphone segments. Arcuri highlighted that the data center market is seen as a particularly favorable environment for Arm, where the demand for power-optimized architectures continues to rise as cloud customers seek more efficient processing solutions. He indicated that the expansion of Arm's customer base for its intellectual property licenses is a significant factor in this growth, enhancing its profitability. Moreover, while smartphones comprise roughly 50% of Arm's revenue, Arcuri believes that the company will still see additional growth in this area despite already having high penetration due to increasing royalty rates and the growing importance of processors in phone costs. Looking into the future, Arcuri projects that Arm's market share in the personal computer segment will grow from 17% in 2023 to 22% by 2028. He anticipates this shift will result in Arm's annual royalties from PCs exceeding $300 million. Notably, in the data center arena, Arm's market share is expected to grow even more significantly, increasing from less than 5% in 2023 to the mid-teens by 2028. This projected growth underscores the critical role that AI plays in driving demand for more powerful and efficient computing solutions across various sectors. In addition to these positive growth projections, the analyst emphasized Arm's commitment to maintaining a robust research and development strategy, sustaining investments in R&D at about 30% of the company's revenue. This focus on innovation is cited as a key strength for Arm, which has a proven track record of productivity in its R&D endeavors over the past three decades. According to Arcuri, this sustained investment is essential for generating high-margin revenue streams in the upcoming decade. Following this positive news, Arm's stock showed a favorable market response, rising about 2% in premarket trading and reflecting an overall rally of approximately 81% year-to-date.