Arm Holdings plc (ARM)

Arm makes no chips at all: it licenses the architecture on which the overwhelming majority of phone processors are built.

The model has two stages. First the company sells a licence to the architecture or to a ready core — a one-off payment for the right to design. Then it collects a royalty on every chip shipped using that core. The first part reflects the future, how many new devices are being designed now; the second reflects the present, its customers' production volume.

Historically the architecture won on power efficiency and so took mobile devices almost entirely. The growth direction is beyond them: server processors at cloud operators, automotive electronics, personal computers. Each such move raises the royalty per chip, because there are more cores inside.

The risks are unusual. Arm's customers are also its competitors: a large manufacturer can design its own core under an architectural licence and pay less. Separately there is the open RISC-V architecture, which carries no royalties at all. The company is owned by SoftBank, and the free float is small.