Arm Holdings

Arm gets paid a little bit on a huge number of the world's chips, and that adds up fast. Revenue grew 23 percent last year and royalties alone hit a record 737 million dollars in one quarter. Because Arm only sells designs and not physical chips, gross margins are close to 98 percent, so almost every extra dollar of sales turns into profit.

The new wave of AI needs the kind of efficient processors Arm specializes in, and the data center side is exploding, with those royalties more than doubling year over year. Arm just launched its own AI data center chip with Meta as a lead partner, and it has already lined up more than 2 billion dollars of committed customer demand for it across the next two years. Arm designs now power roughly half of the computing used by the biggest cloud companies.

The stock has roughly doubled since February and trades at more than 100 times earnings, which means investors are paying a very rich price today for growth they expect years from now. If results merely come in good instead of spectacular, the stock can fall hard, and it is one of the more volatile names out there.

When chipmakers design their own cores instead of using Arm's ready made designs, Arm collects a much smaller fee per chip, sometimes only about 1 percent of the chip's price. So even as Arm's designs spread into more expensive AI chips, the company may have to ship far more of them just to keep its royalty income growing.