UBS initiates Arm Holdings with 'buy', $160 PT

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.