Arm surges after HSBC upgrade cites AI server transition
Analyst raises target to $205 from $90, predicting 76% CAGR in server CPU royalties through 2031
Arm Holdings shares surged more than 5% on Friday after HSBC upgraded the stock from Reduce to Buy and more than doubled its price target to $205, citing a "game-changing" shift in the British chip designer's business model toward artificial intelligence server processors.
The dramatic upgrade from HSBC analyst Frank Lee, raising the target from $90 to $205, signals that Wall Street is increasingly viewing Arm as an AI play rather than primarily a mobile technology company. At $136, Arm now trades roughly 50% below HSBC's new target, which is among the most bullish on Wall Street.
HSBC's report highlights what it sees as a fundamental mispricing of Arm's transition from smartphone-dominated licensing to a growing role in AI server central processing units. The bank forecasts industry CPU shipments will accelerate to 20% growth in 2026 and 21% in 2027, a sharp reversal from the 2% average growth between 2021 and 2025, according to HSBC's analysis.
"We believe the market has not fully reflected Arm's game-changing transition from a smartphone-centric licensing model to a broader and more critical role in AI server CPUs," HSBC analysts wrote in the note, as reported by Benzinga.
The upgrade follows a strong quarterly performance from the Cambridge-based company. Arm reported fiscal third-quarter revenue of $1.24 billion, up 26.3% year-over-year, with royalty revenue growing 27% to a record $737 million. Most notably, the company's data center royalty revenue grew more than 100% year-over-year, according to the earnings transcript.
Management has indicated that the data center segment is on track to become Arm's largest business, surpassing mobile, within a few years—a transformation that appears to be accelerating the company's re-rating by investors.
HSBC estimates that Arm's server CPU royalty revenue could grow at a 76% compound annual rate between fiscal years 2026 and 2031, reaching approximately $4 billion by fiscal 2031. That figure would approach Arm's total expected revenue of $4.9 billion in fiscal 2026, demonstrating the scale of the opportunity in the server market.
The brokerage also pointed to a potentially transformative move into merchant server CPUs as a major upside driver. Increased research and development spending suggests Arm may launch its own server chip, which would shift part of its business model from royalty collections to direct chip sales. Such a move could increase revenue per unit from tens of dollars in royalties to an estimated $1,000 per chip, according to HSBC's analysis.
Arm is scheduled to host its "Arm Everywhere" event on March 24, where analysts anticipate further details on the company's potential expansion into merchant server CPUs. The event will focus on artificial intelligence and the future of intelligent computing, according to the company.
The upgrade represents a dramatic reversal for HSBC, which had previously maintained a Reduce rating on the stock. The bank raised its fiscal 2027 and 2028 earnings estimates by 2% and 9%, respectively, concluding that Arm's evolving business model warrants a higher valuation multiple.
Wall Street broadly maintains a Buy consensus on Arm, with 26 buy ratings, 12 hold ratings, and just two sell or strong sell ratings, according to analyst data. The average price target stands at approximately $148, though HSBC's $205 target is now among the most bullish.
Citi recently reiterated a Buy rating with a $190 price target, citing similar upside from the adoption of Arm's v9 architecture and higher royalty rates in AI data centers. Morgan Stanley maintains an Overweight rating with a $135 target.
The AI server market backdrop provides strong tailwinds. The AI Data Center Market is projected to reach $2.02 trillion by 2032 from $471.6 billion in 2026, representing a 27.5% compound annual growth rate, according to market research.
However, Arm faces growing competitive pressure from the open-source RISC-V architecture, particularly in markets where licensing costs are a concern. RISC-V achieved 25% market penetration by December 2025, especially in IoT and automotive segments, with projections exceeding 21 billion chip shipments by 2031. Qualcomm's acquisition of Ventana Micro Systems in December has intensified competitive dynamics.
Institutional investors have already positioned themselves for the potential transition, with approximately 95% of Arm's shares held by institutions. The stock's surge on Friday comes as it breaks above its 50-day moving average of $117.87, potentially signaling the start of a new technical uptrend following a multi-week recovery from the $115 area.
For investors, the key question is whether Arm can successfully execute its AI server strategy while defending its dominant mobile franchise against RISC-V encroachment. The March 24 event will likely provide critical clues about management's roadmap and confidence in the transformative opportunity that HSBC sees ahead.