Arm's (ARM) new full-chip strategy indicates "significant revenue growth and earnings potential" for the long-term, but may also come with gross margin dilution as well as channel conflict issues, RBC Capital Markets said in a note Wednesday.
The company's management believes complete solutions can expand its data center total addressable market from about $3 billion currently to $100 billion by 2030, the note said, adding management expects initial $1 billion revenue in 2027 and 2028.
The investment firm noted that Arm's management believes the new strategy will complement the company's IP business.
RBC said that, assuming the company reaches its target revenue, overall revenue may see a 40%-plus compound annual growth rate from 2027 to 2031, compared with mid-teens for IP business, while gross margin may decrease from the current 98%-plus to 70% levels by 2031.
The analysts said that "while the business model debate could continue," it expects the company's shares to mainly trade on near-term fundamentals, which are solid.
RBC lifted Arm's price target to $175 from $130, while reiterating the company's outperform rating.
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