ARM Surges on HSBC Double-Upgrade to Buy
HSBC upgraded ARM Holdings from Reduce to Buy with a $205 price target, citing AI server CPU growth potential that could double royalty revenue.
ARM Holdings jumped 4% Friday after HSBC issued a rare double-upgrade, moving the stock from Reduce to Buy and raising its price target from $90 to $205.
The catalyst: HSBC believes ARM is no longer just a mobile chip licensing company. It's becoming a major player in AI server CPUs—and that shift could fundamentally change the earnings trajectory.
The Bull Case
Analyst Frank Lee laid out a straightforward thesis. ARM's v9 architecture and Neoverse Compute Subsystems (CSS) are gaining traction with hyperscalers building their own server chips. Amazon's Graviton, Google's Axion, and Microsoft's Cobalt all run on ARM designs.
The math matters. Lee estimates ARM's royalty revenue from server CPUs could match the company's entire current revenue by 2030—roughly $4 billion. That's incremental to the smartphone licensing business, not a replacement for it.
HSBC projects server CPU shipments will grow 20% in 2026 and 21% in 2027, compared to an average 2% annual growth from 2021 to 2025. ARM collects royalties on each chip shipped, so faster volume growth translates directly to higher revenue.
The Merchant Chip Wildcard
Here's where it gets interesting. Lee also flagged ARM's rising R&D spending as a potential signal that the company may be developing its own merchant server chip—moving from royalty collection to direct chip sales.
If true, the economic shift would be dramatic. ARM currently earns tens of dollars per chip in royalties. Selling chips directly could generate roughly $1,000 per unit. That's a 50x increase in revenue per chip, though it would also require significant capital investment and margin compression in the near term.
ARM hasn't confirmed any merchant chip plans, but the R&D trend is real. The company increased development spending 23% year-over-year last quarter, well above revenue growth.
Valuation Debate
Not everyone agrees with HSBC's optimism. ARM trades at roughly 80x forward earnings, a premium that assumes the server opportunity materializes exactly as projected. If hyperscaler adoption slows or x86 competitors like AMD and Intel mount a stronger defense, the multiple could contract quickly.
Bears also point to ARM's customer concentration. Apple accounts for a significant portion of royalty revenue, and any shift in that relationship—whether pricing pressure or in-house design changes—would impact results disproportionately.
Still, the upgrade carries weight. HSBC was previously bearish on ARM, and the reversal reflects a genuine reassessment rather than momentum-chasing.
Technical Setup
ARM has traded in a wide range this year, bouncing between $110 and $160 as the market debated its AI exposure. Friday's move pushed shares toward the upper end of that range.
Volume was elevated but not extreme. The stock needs to break above $165 with conviction to confirm a new uptrend. Until then, this looks like a relief rally on positive analyst commentary rather than a fundamental breakout.
For options traders, implied volatility remains elevated after the recent tech selloff. The April $170 calls saw heavy buying Friday, suggesting some traders are positioning for a continued move higher into earnings season.
The broader market environment remains challenging, with oil prices and Fed uncertainty weighing on risk assets. ARM's relative strength stands out in that context—but single-stock performance rarely defies the tape for long.