Morgan Stanley made Arm Holdings (NASDAQ:ARM) its new large-cap Top Pick, citing mobile recovery, new edge AI opportunities and the resulting royalties' expansion.
The firm maintained an Overweight rating and a $175 price target on the stock.
Analysts led by Lee Simpson said that after the launch of Apple's (AAPL) iPhone 16 on Monday and the indicated use of Arm v9 architecture in the A18 processor, the British company remains their favored play on the emerging Edge AI opportunity.
The analysts expect mobile to drive initial upside, followed by infrastructure and autos.
The analysts think Arm is an important part of the shift to edge AI. Arm royalties expansion is driven by mobile (35% compound annual growth rate, or CAGR, FY24-27), with medium-term momentum seen in autos, alongside solid growth in Infrastructure. The analysts expect the growing use of v9 cores, plus a shift to more custom silicon work, to be a feature of mobile growth.
Simpson and his team noted that the iPhone 16 release suggested the use of an Arm-based A-series processor (A18) in the device. They think this is likely an Armv9-based core, probably using CPU extensions that give greater resource balance in the device across CPU, NPU and GPU.
Apple is expected to stagger the release of its AI features, and with expectations for 225 million to 240 million iPhone units in FY'25 but the analysts believe that this could climb to a range of 230 million to 260 million and above in FY26. Arm's fiscal year 2025 ends in March 2025.
In addition, the analysts stated that Arm is the global leader in silicon IP and is often overlooked as an AI beneficiary. They think of Arm as more than a mobile CPU story, and instead look to the growing use of custom silicon on Arm as a strong driver of royalties' expansion (including a shift to higher royalty rates) in the next two-to-three years at least.
Drivers of custom silicon royalties already come from cloud AI (initial volumes), but this will shift in large part to mobile soon (starting in the March quarter or fiscal fourth quarter 2025), according to the analysts.