HSBC has shifted its view on Arm, upgrading the chip designer to a Buy from Reduce and more than doubling its price target to $205 from $90. The broker argues that Arm's evolving role in the market - moving away from being primarily a smartphone licensing business toward a supplier whose technologies power artificial intelligence server processors - is not fully captured in current valuations.
In its analysis, HSBC described Arm’s transition as "game-changing," driven by growing demand for server chips tied to agentic AI workloads. The bank highlighted that this demand is expanding the addressable market and should support higher unit growth for CPU makers. HSBC projects industry CPU shipments will rise by 20% in 2026 and 21% in 2027, a marked acceleration from the roughly 2% average annual growth seen between 2021 and 2025.
HSBC pointed to the increasing adoption of Arm’s v9 architecture and the Neoverse Compute Subsystems as a factor boosting royalty rates per chip. As customers, including major hyperscalers, migrate to these newer designs, royalty income per unit should rise, the bank said, and the move to processors with higher core counts will further expand royalty potential. Based on these dynamics, HSBC estimates Arm's server CPU royalty revenue could grow at a 76% compound annual rate between fiscal 2026 and 2031.
The bank projects royalties from the server CPU segment alone could approach roughly $4 billion by fiscal 2031. For context, HSBC noted that Arm’s total revenue is expected to be about $4.9 billion in fiscal 2026, underscoring how rapidly the server segment might scale relative to current top-line expectations.
HSBC also identified the possibility that Arm could enter the merchant server CPU market as a substantial upside. The bank observed a sharp increase in Arm’s research and development spending and suggested this could presage the company launching its own server chip. Such a strategic move would shift a portion of Arm’s business from a royalty-based model toward direct chip sales, potentially increasing revenue per unit from the current tens of dollars in royalties to roughly $1,000 per chip, according to HSBC’s analysis.
Investors can anticipate further detail at Arm’s "Arm Everywhere" event on March 24, the bank added. Reflecting these expectations, HSBC raised its fiscal 2027 and 2028 earnings estimates by 2% and 9%, respectively, and argued that Arm merits a higher valuation multiple given the company’s changing business mix and long-term growth prospects.
Key points
- HSBC upgraded Arm to Buy from Reduce and lifted its price target to $205 from $90, citing an AI-driven shift in the company’s market opportunity.
- Bank forecasts industry CPU shipments to accelerate to 20% in 2026 and 21% in 2027, driven by demand for AI server chips and adoption of Arm v9 and Neoverse subsystems, boosting royalties per chip.
- Potential entry into merchant server CPU sales - signaled by higher R&D spending - could materially raise revenue per unit and provide additional upside.
Risks and uncertainties
- Plans to launch merchant server CPUs are suggested by elevated R&D spending but are not confirmed; execution and market reception remain uncertain.
- Royalty expansion depends on continued adoption of Arm v9 architecture and Neoverse Compute Subsystems by large customers, including hyperscalers; slower migration would limit upside.
- Projected royalty and shipment growth assumptions underpin HSBC’s upgraded estimates; deviations from these forecasts could affect expected earnings and valuation outcomes.