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After writing about Intel (INTC) yesterday and the idea of the fabless chip fabricator, I set about looking for a better example of how a chip company can be. I found it in ARM Holdings (ARMH), a British company that not only doesn't have its own fab, but doesn't make its own designs.

Instead it licenses low power process, ASIC, and communication designs to others, taking such a scanty portion of the revenue chain that annual sales are still short of half a billion.Yet so much of that goes to the bottom line – nearly one dollar in four last year – and its designs are so good it really does have Intel on the run.

Microsoft's (MSFT) decision to divide Windows 8 in two, with one strain aimed strictly at mobile devices like tablets, is a huge boost for ARM to the point where Intel actually has to tell analysts it can compete.

Its success in mobile devices has let ARM separate itself from Intel over the last two years, tripling in value while Intel has stayed flat, and delivering an 86 PE even Jon Gruden would have to call “redunkulous.” The only way to play such a hefty multiple is to assume a buy-out, with Intel the most likely buyer. But current prices make it too rich even for Intel.

ARM's success is driven by the fact that its processor design tops Intel's Atom in head-to-head tests.The designs are shipped to companies like Freescale (FSL), the foundry spun out of Motorola (MMI), and what makes ARM superior is ARM's low power consumption, which means more compute time between charges.

Understanding this, CEO D. Warren East, who came to the company from Texas Instruments (TXN), has been funding research into ultra-low energy computing , looking for niches like wearable medical devices that could grow quickly.

It's a great company, but right now the only way to play it is to bet on a fall, as East has warned off suitors and sold 100,000 shares from his own account, something you don't do if you're about to sell out at a premium.

Right now, no European firm can justify an 86 PE in a slowing economy. Of course, that's what Merrill saw in August, downgrading ARMH to underperform based on its valuation. Since then it's up another 9%.

If we get another major leg downward in the market, I'd have ARMH on my wish list.

Source: ARM Holdings Is Everything Intel Isn't