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%.