ARM's (ARM) strong data center performance and Compute Subsystems adoption are helping offset smartphone memory challenges, RBC said in a note Wednesday.

The company's fiscal Q3 results and fiscal Q4 outlook were slightly better than expected, the analysts said, adding that although uncertainty remains around ARM's chiplet and system-on-chip strategy, management plans to provide more details on March 24.

The analysts said the stock's recent underperformance is due to concerns about related-party contributions, as SoftBank accounts for roughly 15% of sales, and higher operating expenses, potentially linked to chiplet and full system-on-chip initiatives.

However, the core royalty business remains strong, supported by the adoption of version 9 architecture and the Compute Subsystems platform, which the analysts see as a multi-year tailwind for average selling prices.

Data center market share gains are accelerating, driven by Nvidia (NVDA) and custom hyperscale designs, the analysts said. The licensing business is also on solid footing, with artificial intelligence renewing customer interest in chip design, the analysts added.

RBC adjusted its price target on ARM to $130 from $140 while keeping its outperform rating.

Price: 109.92, Change: +5.02, Percent Change: +4.79