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The Other Intel: Investors Ignore the Good

With a stock trading at $25 and a price-to-earnings ratio of 9 -- unfitting for a tech giant -- I'm beginning to realize that when it comes to chip-giant Intel (INTC), Wall Street is dealing with a severe case of selective amnesia.

When looking at its peers such as Qualcomm (QCOM) and ARM Holdings (ARMH), the case to be made is that either Intel is harshly undervalued, or its rivals including Texas Instruments (TXN) and Nvidia (NVDA) are trading at inflated valuations -- it can't be both. This is precisely the question that astute investors should be asking following the company's recent second-quarter earnings report.

The Quarter That Was

For the quarter, Intel generated net income of $2.83 billion, or 54 cents per share, on revenues of $13.5 billion -- topping analysts' EPS expectations while meeting its sales forecasts. What I found to be interesting was that the company said that PC shipments arrived at 87.5 million units for the quarter -- representing a 0.1% decline from the previous year.

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What was also derived from the report was the company's sequential revenue growth, which arrived at 5%, while its PC revenue rose at a respectable 4%. So essentially, the rumored death of the PC has not arrived as drastically as previously anticipated. Intel is an excellent indicator of PC growth because not only are 80% of the world's PCs using its chips, but its biggest customers are the top two PC manufactures in the world, Hewlett-Packard (HPQ) and Dell (DELL).

So should this inspire some optimism for investors of the latter two companies? Perhaps, but it does not remove the impact of the growing tablet and mobile devices market -- which is now dominated by Apple (AAPL) and Google (GOOG) and their suppliers in Qualcomm and ARM. That said, Intel's gross margin arrived strong and showed no signs that it has been impacted by the market shift.

Even more remarkable was that the company showed no meaningful slowdown due to the economic challenges in Europe whereas rival Advanced Micro Devices (AMD) absorbed not only a significant drop of 10% in revenue, but also a 40% decline in profits due to poor European sales. So with these poor numbers from AMD, I think Intel took the right approach and eased guidance.

As great as the quarter was, it didn't appear to add much life to the stock. So now the question is, to what extent can Microsoft's (MSFT) highly anticipated Windows 8 launch remain as a catalyst for Intel? What's more, investors have been eager to play the PC product life cycle refresh ahead of the launch. It would seem that with Intel having an 80% share of the PC market, this would be a tremendous revenue boost.

Whether these expectations come to fruition is not the story. The issue continues to be how to fairly assess the company's current state and where it is likely heading. It does not appear as if the market is expecting a whole lot from Intel and instead has turned its attention to the aforementioned new chips on the block -- namely ARM Holdings, Qualcomm and Nvidia.

Bottom Line

What Intel needs is more time -- which seems to be the prevailing theme for once high fliers who are still valuable but have been unable to provide Wall Street with the growth that it craves. I think Intel will eventually re-capture its magic and prove that is can continue to increase its margins and outperform its rivals.

From an investment perspective, the stock is trading under its fair market value, which I have estimated to be right around $32. For value investors with patience, the stock should be considered a buy at these levels.

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