Shares of Arm Holdings (POOR 8.76%) rose sharply on Thursday, gaining as much as 8.8%. At 12:30 p.m. ET, the stock was still up 8.3%.

The catalyst that drove the semiconductor specialist’s share price up was an upgrade and an optimistic comment from a Wall Street analyst.

Better days are coming

Daiwa Securities analyst Louis Miscioscia upgraded Arm Holdings from neutral (hold) to outperform (buy) and set a price target of $130, representing potential gains for investors of 21% from Wednesday’s closing price. The analyst pointed to the recent sell-off in artificial intelligence (AI) stocks and Arm’s recent price action, calling it “an interesting and volatile couple of quarters.”

The analyst further said that his firm does not believe in a recession and hinted that the Federal Reserve will soon begin cutting interest rates, giving Arm a clear path to the upside in the coming months.

A great opportunity

It’s clear that the analyst has done his homework. In the first quarter of fiscal 2025 (which ended June 30), Arm delivered solid results. Record revenue of $939 million increased 39% year over year, driven by a 72% increase in license revenue and a 17% increase in royalty revenue.

In addition, the emergence of generative AI represents a major opportunity for Arm. The company’s latest processor, the Arm Version 9 (V9), is a critical component in AI semiconductors. For example, NVIDIAThe cutting-edge GH200 Grace Hopper superchip – which combines accelerated CPU and GPU technology to process AI – uses 144 Arm V9 CPU cores. These processors not only offer more processing power – which drives demand – but also contribute twice the previous generation’s license fee, which will increase Arm’s revenues.

Investors have raised concerns about Arm’s high valuation, and it’s easy to see why. Arm was trading at 68 times forward earnings and 23 times sales at market close yesterday, which seems outrageous at first glance. But that doesn’t take into account the company’s current growth trajectory. The more appropriate yardstick is the forward price-to-earnings-growth (PEG) ratio, which stands at 0.16, while any reading below 1 is the standard for an undervalued stock.

This suggests that Arm stock is a buy.