Microsoft's move to make its Windows software compatible with chips designed by ARM throws open computer markets previously dominated by Intel.
The move is seen as an overdue acknowledgement by Microsoft that computing is moving away from the desktop, dominated by Intel's chips, to mobile devices, where power-efficient ARM microprocessors have a clear lead.
Microsoft was overtaken last year as the most valuable tech firm worldwide by Apple, thanks to Apple's iPad hot on the heels of its iPhone that transformed the mobile Internet. Both devices are powered by ARM chips. Other tablet offerings also sidestep Intel.
Investec said the significance of a move by Microsoft away from the 'Wintel' model that has dominated computing for a quarter of a century -- Windows running on Intel's x86 microprocessor architecture -- was hard to overstate.
It shows a determination on the part of Microsoft to compete seriously with Apple and Google Android-based devices in the tablet and portable device market, its analysts said.
ARM's Chief Executive Warren East said on Thursday that Microsoft's move marked a significant milestone for ARM and its chipmaker partners.
The announcement, made at the Consumer Electronics Show in Las Vegas, sent ARM's shares soaring as investors hoped it would drive further growth for the highly rated British chip designer.
Shares in the Cambridge-based firm rose as much as 13 percent, topping the FTSE leaderboard for the second consecutive day and reaching the highest level for nearly 10 years. They were 7.6 percent higher at 507 pence by 1333 GMT.
ARM's chips, made by manufacturers such as Nvidia, Qualcomm
and Texas Instruments, power nearly all the world's mobile phones and are embedded in electronic devices ranging from toys to air conditioners.
They also dominate the tablet sector. Companies such as RIM and Motorola, are unveiling tablets in Las Vegas, most of them running Google operating systems and powered by ARM-based processors.
ARM received another boost at the show when graphics chip designer Nvidia Corp said it would begin designing central processors for personal computers based on ARM architecture.
Charles Stanley analyst Tom Gidley-Kitchin said ARM had ambitions to be at the center of every connected device, and a lot of investors wanted to participate in that.
There is no doubt that in the long term ARM plus Google represents a major threat to Windows plus Intel, he said.
Microsoft did not set a timeframe for the new software but analysts believe it will coincide with the launch of Windows 8 in 24-36 months time.
The news was welcomed by investors who have piled into the stock since the U.S. company signed a license to use ARM's technology in July.
ARM now trades on a lofty times 47 times next year's earnings, far above the 11 times rating of much-bigger Intel.
While sell-side analysts are universal in their admiration for ARM, some say it is now overpriced.
Some 13 analysts have a sell or strong sell on the firm, according to Thomson Reuters Starmine, against six on buy or strong buy, and eight on hold. They have an average price target of 314.5 pence.
Gidley-Kitchin said investors had to make some pretty heroic assumptions to support the shares at the current price, and he has a sell rating on the stock.
Sales of tablets are expected to increase sevenfold to more than 150 million units a year by 2013, according to research firm Gartner, but that would still represents a small part of ARM's overall business. The chip designers partners shipped 1.5 billion chips in the third quarter alone.
Analyst Paul Morland at Peel Hunt also said the shares were overvalued. This confirmation is a major boost for ARM in its battle with Intel but unlikely to impact numbers until late in 2012, he said.
Shares trade on 47 times 2011 earnings which we think is too much given the risk of a quarterly miss at some stage and a lack of upgrades.
UBS, however, which is neutral on the shares, said the development was very positive for ARM in the long term.
It said if the ARM were to gain 50 percent of the PC system-on-chip market in the longer term -- say five years -- it could be generate about $100 million of annual revenue and add 20 pence of value a share.
And an even larger opportunity could come in servers. ARM's partners are working on chips, although East has said an ARM-powered server is about five years away.
ARM taking over the PC market is probably less likely, certainly for a long time, Gidley-Kitchin said.
But the server market is Intel's second market and it's hugely profitable ... ARM-based servers are a few years away but if you are looking for valuation looking at cash receipts a long way out is par for the course.
(Additional reporting by Georgina Prodhan; Editing by Andrew Callus)