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ARM Chips Riding Google's Android Wave

ARM Holdings' chips power many Android gadgets. Here's why the company might finally be a buy.

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.

>>Google's Mobile Efforts Are Investment Gold

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) - Get Report

, 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) - Get Report

or

Intel

(INTC) - Get Report

-- 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) - Get Report

,

Broadcom

and others. Those companies then take the plans for creating a processor and manufacture them for their own mobile customers.

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More than 15 billion ARM-based chips have been bundled in devices, including past versions of Apple's iPhone and the

Google

(GOOG) - Get Report

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) - Get Report

and

ST-Ericsson

to help speed the process of getting Linux-based devices to store shelves.

Dubbed Linaro, the not-for-profit organization streamlines the process of hardware vendors getting the software they want -- in most cases Google's Android OS -- onto devices running the processors they want. The organization will provide both software and hardware tools to get software running on partner chips sooner rather than later. According to the organization, such a strategy could help bring a glut of new Android smartphones and tablets to the market.

"The existence of Linaro will significantly simplify the process of making Linux-based consumer devices available to market," Jane Silber, CEO of Linux supporter

Canonical

, said in a statement. "By standardizing many of the core software components, companies can focus on creating great user experiences on embedded devices through to smart phones."

Linaro's formation could be extremely good news for Google. Although Apple's iPhone enjoys higher sales than any individual Android-based device, Android products are selling quite well. In fact, market-research firm NPD reported in May that during the first quarter of 2010, more Android-based devices were sold than iPhones. Granted, NPD's figures include a collection of smartphones against one, but it effectively illustrates a key point: Google and Android are coming on strong.

That success has prompted hardware companies to use Google's operating system in the many mobile devices they have planned. And thanks to Linaro, those companies will no longer need to wait so long between hatching a mobile strategy and actually bringing a device to store shelves. Not only will that increase the sheer number of Android-based devices available, and thus, the number of processors that ARM's partners develop, but it will also increase Android sales.

In other words, Google, ARM, and its many partners will benefit. And so too will savvy investors that see the mobile market is growing, and getting in on its burgeoning component industry is a smart move.

--Written by Don Reisinger in New York

See Also:

>>E3 Investors' Guide

>>Microsoft Is No Longer Too Big to Fail

>>E3 2010: Keep Away From 3D Gaming

Don Reisinger has been writing columns and blogs about the technology and video game industries for years. His work appears in some of the tech industry?s biggest publications, as well as in the

Los Angeles Times

, where he blogs about social networking. Follow Reisinger on Twitter @donreisinger.