Arm's AI Ambitions: Susquehanna Forecasts $1B+ Annual Royalty Stream from Custom AI Chip
In a significant vote of confidence for Arm Holdings plc (NASDAQ: ARM), analysts at Susquehanna Financial Group have upgraded the chip design giant from Neutral to Positive, setting a price target of $150. The upgrade, issued on January 21, hinges on what the firm calls two "company-changing initiatives" that could redefine Arm's growth trajectory in the burgeoning artificial intelligence market.
The first is a collaboration with SoftBank and Broadcom to produce a custom AI XPU (accelerated processing unit) ASIC for OpenAI. The second involves developing a custom server CPU, potentially for Meta Platforms Inc., which would mark Arm's first full silicon product. While specifics on the AI chip remain under wraps, Susquehansa's analysis suggests the OpenAI project alone could eventually yield more than $1 billion in annual royalty revenue. This stands in stark contrast to the company's total projected royalty revenue of $2.5 billion for the current fiscal year.
"This isn't just another licensing deal; it's a strategic pivot," said market analyst Rebecca Cho of Horizon Insights. "Arm is leveraging its architectural efficiency to carve out a central role in the data center and AI infrastructure build-out, areas where it has historically had limited presence."
The bullish outlook comes despite acknowledged headwinds. Susquehanna anticipates potential royalty pressure in 2026 for mobile and PC markets due to memory pricing dynamics. However, the firm contends these challenges are already priced in, especially after the stock's recent 40% pullback. The new AI and custom silicon ventures are seen as catalysts capable of driving growth well above Arm's current "modest ~10% royalty contribution" from new technologies.
Arm, whose energy-efficient CPU architectures power nearly every smartphone globally, has been aggressively expanding into new frontiers like automotive, IoT, and now, high-performance AI computing. This analyst move underscores a broader market realization: Arm's future may be less dependent on the cyclical smartphone market and more on its ability to monetize its designs in the AI gold rush.
Market Voices: A Divided Street
Michael Torrence, Portfolio Manager at Cedar Rock Capital: "Susquehanna's math is compelling. A $1B+ annual royalty stream from a single design win is transformative. It validates the thesis that Arm's IP is becoming indispensable beyond mobile, providing a durable, high-margin revenue stream that the market has yet to fully value."
David Park, Independent Tech Analyst: "Let's not get carried away. 'Could ultimately earn' is the key phrase here. We're talking about a chip that's not yet in production, for an AI market that's frothy and unpredictable. This upgrade feels like chasing momentum. Remember, execution risk and competition from RISC-V are very real."
Lisa Hammond, Chief Investment Officer at Apex Advisors: "This is a classic case of Wall Street hype. They downgrade on mobile weakness, the stock tanks, and now they upgrade on speculative AI dreams? The $1B figure is a back-of-the-envelope projection for a product we know nothing about. It's irresponsible analysis designed to generate headlines and trading commissions."
Arjun Mehta, Semiconductor Research Lead at FinTech Global: "The strategic importance is undeniable. Landing design wins with OpenAI and Meta isn't just about revenue; it's about ecosystem lock-in. If these AI giants standardize on Arm's Neoverse platform for custom silicon, it creates a formidable moat. The royalty potential, while years out, is a legitimate reason for re-rating the stock."