An Arm Holdings logo is held by an Android operating systems robot at the Mobile World Congress in Barcelona, Spain, on March 1, 2012. © Chris Ratcliffe, Bloomberg via Getty Images

Yes, yes, Intel (INTC) is the king. It's the dominant player in the markets for chips used in personal computers and laptops, as well as big computer servers.

But its stock price isn't as impressive, at least not right now. It trades at around $24 -- down from about $29 roughly a year ago, and a level it first hit back in the tech boom. In the last century.

A healthy 3.7% dividend yield does encourage investors, but the market has realized that Intel is not invulnerable. The company faces multiple challenges as smartphones and tablet devices replace personal computers and laptops as the door to games, news, sports scores, movie and TV gossip, and email.

One challenge comes from a company that can rightly claim to be the next Intel -- at least for now, in a small way. And while it's tiny in comparison, that gives it more room to grow into a giant in the industry -- and in investors' portfolios.

Strong ARM

ARM Holdings (ARMH), based in Cambridge, England, helped pioneer the design of tiny, low-powered chips that run the operating systems of more than 90% of smartphones and tablet devices. And that share is expected to remain high for the foreseeable future -- no matter what Intel does.

If you buy a smartphone using Google's (GOOG) Android operating system or an Apple (AAPL) iPad or iPhone, there may be chips inside made by Samsung Electronics, Qualcomm (QCOM), Broadcom (BRCM), Nvidia (NVDA) and Texas Instruments (TXN). But just about all those chips are based on designs created at ARM.

Charley Blaine, MSN Money

Charley Blaine

ARM's shares, how trading at around $47 in the United States, have outperformed Intel's since the bottom of the 2008-2009 crash, rising some 1,200%, while Intel shares are up less than 100%. ARM reported a 26% increase in first-quarter revenue and a 58% increase in earnings per share. Analysts see revenue growing 16% for the year, topping $1 billion for the first time.

In its first-quarter report, Intel reported a 2.5% fall in revenue and a 25% profit decline. 

Of course, Intel dwarfs ARM by just about any measure. Intel has more than 100,000 employees; ARM has just 2,460. Intel's 2012 revenue was $53.02 billion, compared with ARM's $951.43 million. Intel's market capitalization is $115.85 billion, compared with ARM's $21.29 billion.

ARM's market capitalization, however, suggests that investors can't get enough ARM shares. Here's a way to make the point clear: The ratio of Intel's market capitalization to its 2012 revenue is 2.19, compared with 22.37 for ARM. That means investors are willing to pay a lot more for a piece of every dollar ARM brings in.

The PC problem

Intel's vulnerability lies in the business that had made it so big: Nearly two-thirds of its revenue comes from sales to the PC industry. Notebook sales in particular have been getting crushed by the competition from smartphones and tablets.

Hewlett-Packard (HPQ) alone buys about 18% of Intel's chips; Dell (DELL) represents an additional 14% of Intel's business. In the first quarter, PC shipments fell 13.9% from a year ago. IPad sales were up 65%. PC shipments fell nearly 4% in 2012; iPad shipments jumped 43.6%.

The first-quarter declines came after PC shipments worldwide fell 3.5% in 2012 to 352.7 million units. Analysts at technology research firm Gartner concluded that customers were substituting tablets for PCs. PCs are increasingly being used as a tool for creative or shared tasks, Gartner said. Tablets and smartphones are doing the rest.

The quest for less power usage

So, why hasn't Intel simply crushed ARM and all the chipmakers that build semiconductors using ARM's designs? After all, it effectively protected itself from a challenge from Advanced Micro Devices (AMD) not that long ago.

The short answer is that what device-makers want are chips that use very little power and that generate little heat. More importantly, such chips need to give tablet or smartphone users plenty of time to make calls, watch videos or check sports and TV news without needing to charge the devices frequently.

For years, Intel instead focused on designing chips for speed and processing power. Only in the past few years, with its Atom family of chips and new chips due this year, has the chip giant really gone after the device market. Intel's new Haswell chips, due out in June, are also meant to compete strongly against ARM-based semiconductors. Many investors see the new chip family as giving a boost to new generations of netbooks and laptops.

But in the meantime, ARM has been able to carve out a sizable and growing niche for itself. It will take time for Intel to gain much of a market share in the market for low-powered chips. It is gaining some traction from Microsoft's (MSFT) tablet business, which now represents 7.5% of tablet sales. (Microsoft publishes MSN Money.) But Microsoft's new Windows 8 operating system was also designed to be able to run on ARM-based tablets, as well as Intel-based devices.

Only the paranoid survive

One of the great powerhouses of Silicon Valley, Intel designs, manufacturers and markets its own products.  It was the dream of a host of disaffected engineers at Fairchild Semiconductor who left in 1968 to form a new company. And it has been wildly successful, often reporting annual revenue increases of 50% or more.

Co-founder Gordon Moore coined Moore's law, which says the number of transistors on an integrated circuit doubles about every 18 to 24 months. More transistors mean faster computers able to perform many more tasks.

Former CEO Andrew Grove was treated as a philosopher king by the media and became famous for his book: "Only the Paranoid Survive."

When Intel developed the 8080 processor and then the 8086 chip in 1978, it laid the groundwork for the personal computer, which revolutionized the global economy starting in the 1990s. And Intel and Microsoft were able to supplant IBM (IBM) as the dominant players.

For nearly three decades, the stock was a great one to own. If you'd bought 100 shares of Intel (at $23.50 a share) when it went public in 1971 and stayed with it through thick and thin and 13 splits, your stake would be worth $2.86 million today. But there's a downside to this rosy scenario.

Intel's share price peaked at $75.69 in the late summer of 2000 and hasn't been anywhere near that level since. It hasn't done much for investors lately.