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Like Your Smartphone? Thank This Company

Friday, 16 Oct 2009 | 7:42 PM ET

“Some companies are practically monopolies simply because no one else can come close to doing what they do,” Cramer said Friday.

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He put ARM Holdings , the newest member of Mad Money’s Mobile Internet Index, in that category.

ARM, filling the space left by Cisco’s purchase of Starent Networks , is a leading semiconductor intellectual-property supplier, designing chip technology that’s used in high-tech gadgets, including most of the world’s mobile phones. The company then licenses that tech out to the industry’s major players and collects royalties. Gone are the days when semi firms handled the design themselves. It’s actually much cheaper to outsource the work, and that’s how ARM makes its money.

Cramer's Bullish on ARMH
Making the case for ARM Holdings, with Mad Money host Jim Cramer.

ARM’s technology controls 95% of the portable electronics market. Hence Cramer’s reference to a virtual monopoly. Right now about five chips in every smartphone are based on ARM’s design, and that number’s increasing as the mobile Internet continues to grow. Qualcomm , which makes 3G and 4G wireless networking possible, uses ARM’s underlying architecture on all of its chips.

There’s a play on personal computers here, too. ARM has developed a processor that may have bested that used by Intel and AMD , the standard for powering PCs and netbooks. ARM’s technology requires substantially less power, thereby extending battery life. That’s crucial in the era of on-the-go computing. Plus, ARM is partnering with Google on the launch of its new Chrome operating system, which will help to extend ARM’s footprint in the netbook market.

The stock may look cheap given that it’s up 101% since the March lows and is trading at 25 times earnings, but Cramer still called ARM cheap. Why? Because earnings are expected to grow at a rate of 30%.

“I can’t think of a better stock than” ARM Holdings, Cramer said, to replace Starent Networks in the Mobile Internet Index. “This is one of the best long-term stories in the semiconductor world.”

Cramer's charitable trust owns Cisco Systems and Qualcomm.

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