Why Arm Holdings Stock Rallied This Week
Key Points
Analysts at HSBC argue that Arm Holdings' stock is significantly undervalued.
AI-related revenue could soon eclipse Arm's lucrative smartphone royalties.
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Shares of Arm Holdings (NASDAQ: ARM) climbed this past week, following bullish analyst commentary.
According to data from S&P Global Market Intelligence, Arm's stock price rose by more than 14%.
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An overlooked AI winner
HSBC analyst Frank Lee upgraded his rating on Arm's stock to buy. He also more than doubled his price target to $205. That implies potential gains of 55% for investors who buy shares now.
Lee believes Wall Street is underestimating the "game-changing" impact of artificial intelligence (AI) on Arm's business. The British chip designer has been largely reliant on the slow-growing smartphone market in recent years.
Now, however, Arm stands to benefit from a forthcoming surge in AI-driven demand for high-performance server processors, according to Lee.
A powerful new growth driver
Graphics processing units (GPUs) have fueled the early stages of the AI boom. With their parallel processing capabilities, which enable them to break up complex computing tasks into smaller ones and execute them simultaneously, GPUs are well-suited for AI model training.
Yet central processing units (CPUs), with their sequential processing, can offer energy efficiency and cost advantages for certain AI inference workloads. Inference is the use of a trained model to make a prediction or decision.
Lee, in turn, estimates that Arm's server CPU royalty revenue will surge by 76% annually over the next half-decade. That would place it at about $4 billion by fiscal 2031. For context, Arm generated $4 billion in total revenue in fiscal 2025.
Adding a lucrative and rapidly growing revenue stream of this size would likely drive Arm's share price sharply higher in the coming years. Lee's new price target, in turn, may prove conservative.
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HSBC Holdings is an advertising partner of Motley Fool Money. Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool recommends HSBC Holdings. The Motley Fool has a disclosure policy.
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