Investing.com -- Morgan Stanley (NYSE:MS) named Arm Holdings (NASDAQ:ARM) as its new top pick, citing the company's strong position in the growing Edge AI market.
Following the launch of the iPhone 16 and the inclusion of Arm's v9 architecture in the A18 processor, Morgan Stanley analysts see Arm as a key player, with mobile driving the initial upside, followed by infrastructure and automotive sectors.
"Arm remains our favoured play on the emerging Edge AI opportunity," the investment bank wrote. "We expect the growing use of v9 cores, as well as a shift to more custom silicon work, to be a feature of mobile growth."
Mobile is expected to be the main catalyst, with a projected 35% compound annual growth rate (CAGR) from FY24 to FY27.
Additionally, Morgan Stanley says the deployment of v9.2 scalable matrix extensions highlights Arm's increasing importance in mobile AI.
The bank's analysts believe Arm's expansion in royalties, driven by mobile adoption, will have a significant impact on its bottom line, projecting a 44% CAGR in earnings from FY24 to FY27.
They also point to the company's recovery in licensing deals, which are expected to improve in Q4 as a major client renews its agreement with Arm.
The release of Apple (NASDAQ:AAPL)'s iPhone 16, which uses an Arm-based A18 processor, is seen as a major opportunity for Arm, especially with Apple's AI feature rollout expected to boost iPhone shipments to 230-260 million units in FY26.
This aligns with Arm's mobile growth expectations as the company capitalizes on the new iPhone product cycle.
While Morgan Stanley adjusted its FY27 EPS estimate to $3.63, slightly down from previous estimates, the analysts maintain a price target of $175, representing a premium to its peers due to Arm's CPU dominance and critical role in the development of Edge AI.