This article has been adapted from our sister site across the pond, Fool U.K.
Christmas has come early for shareholders in ARM Holdings (Nasdaq: ARMH). On Wednesday morning, the technology company's share price rose nearly 9% in London trading on rumors that Microsoft (Nasdaq: MSFT) is about to reveal a new version of Windows that's optimized to run on ARM-designed microprocessors.
According to media reports from Bloomberg and others, anonymous sources familiar with Microsoft's plans say it will reveal the new operating system at next month's Consumer Electronics Show.
Microsoft is yet to achieve much success at getting Windows -- still ubiquitous on desktop PCs -- into the burgeoning tablet market. And while many companies have released various tablets over the years, so far only Apple (Nasdaq: AAPL) has achieved big sales. According to research firm Strategy Analytics, Apple's iPad accounted for 95% of tablet sales in the past quarter. Apple uses its own operating system on the iPad.
But the tablet market is still very young. Apple has sold about 7.5 million iPads since its launch in April -- a number dwarfed not just by the PC market, but also by the prospects for the tablet market in 2011, which is predicted to grow at least five-fold.
Hence Microsoft's interest in the devices -- and ARM's opportunity to profit should more manufacturers choose its chips (already ubiquitous on mobile) for their tablets.
Gathering Intel
How wonderful it would be if ARM was an undiscovered story, ready to be transformed by this news. In reality, ARM has an extremely high P/E and is yielding less than 1%.
As I've written before, what was strange about ARM is how for years it struggled to turn the popularity of chip designs into strong profit growth. As a result, the shares went nowhere for years.
For the past few quarters, though, ARM has been growing normalized earnings per share at well over 50%. If it can keep that up, I think the shares are cheap, even with its ambitious P/E.
So while I admire ARM as a U.K. success story, on valuation grounds I prefer the look of Microsoft's old dance partner, Intel (Nasdaq: INTC).
Shares in the U.S.-listed giant have been treading water, like ARM until relatively recently. Yet after a slow start, Intel's mobile chips are reportedly becoming much more competitive. The shares trade on a P/E of just over 10. It's got no debt and a ton of cash. There's even a yield over 3% on offer.
More from Fool U.K.'s Owain Bennallack:
