Fabless

A fabless company designs computer chips but doesn't manufacture them. The name comes from "fab," the industry's word for a chip factory. The designer creates the chip and pays a specialist manufacturer, called a foundry, to make it, then sells the finished chips under its own name.

The model exists because chip factories are enormously expensive to build and keep current. Going fabless lets a company spend its money on design and software instead, which usually means higher returns on capital and far lower capital expenditure than a manufacturer of similar size. It's a form of asset light business inside an industry known for heavy spending.

The tradeoff is dependence. A fabless company relies on a small number of foundries for its entire supply, so it shares that foundry's capacity limits, pricing power and geographic risk, for example if most production sits in one country. When reading a fabless company's results, check who makes its chips, whether it can secure enough capacity to meet demand, and how exposed that supply is to a single location.