ARM Chips Riding Google's Android Wave

NEW YORK (TheStreet) -- Got an Android phone? Chances are pretty good that it's powered by a processor from ARM Holdings(ARMH), a company whose new strategy has made it a potentially viable investment target.

The mobile market is growing at an astounding rate. According to a recent FCC report, 90% of Americans had at least one mobile device at the end of 2008. Mobile traffic increased by 157% between 2008 and 2009. And currently, smartphones account for more than 50% of all mobile sales. That figure was at just 29% of total mobile sales in the second quarter of 2008.

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Keeping that in mind, it's important for investors to realize that every single one of those devices runs on a processor. And save for Apple(AAPL), which powers its mobile products with its own A4 processor, the vast majority of mobile devices run on ARM chips made by third-party vendors.

ARM chips are some of the most ubiquitous processors in the tech industry. But rather than manufacture those processors like AMD(AMD) or Intel(INTC) -- two firms that have been slowly working their way into the mobile market with very little success -- ARM licenses its technology to partners like Samsung, Texas Instruments(TXN), Broadcom(BRCM) and others. Those companies then take the plans for creating a processor and manufacture them for their own mobile customers.

More than 15 billion ARM-based chips have been bundled in devices, including past versions of Apple's iPhone and the Google(GOOG) Nexus One. Over the past year, ARM's share price has more than doubled. Both its quarterly profits and profit margins have exceeded its 2009 figures.

But amid all that success, the company has been experiencing an issue with its business model. Google's Android operating system has been gaining popularity. And as more Android handset makers request components for their smartphones and, thanks to the iPad's success, tablets, ARM's many partners haven't been able to accommodate the requests as quickly as they would have liked.

To address that problem, ARM has formed a partnership with Texas Instruments, Freescale Semiconductor, IBM(IBM) and ST-Ericsson to help speed the process of getting Linux-based devices to store shelves.