Riding Intel's Tough Road Toward $25

| About: Intel Corporation (INTC)

I'm not as excited about Intel's (NASDAQ:INTC) prospects as some would like for me to be. This, however, doesn't mean I've given up on this company. But I would like Intel much better if management were able to figure out ways to accelerate the company's push into mobile while (at the same time) shedding the company's PC dependency.

Has Intel made considerable progress? Sure. But I don't believe that rivals such as Qualcomm (NASDAQ:QCOM) and Broadcom (BRCM) are feeling threatened, either. The pace hasn't been all that great. And the company's lack of leverage has hurt. But investors can still profit from Intel's recent improvements. To that end, first quarter report was encouraging.

The miss that really wasn't

Intel reported net income of $2 billion, or 40 cents per share, compared with net income of $2.7 billion, or 53 cents per share, for the same period a year ago. Revenue also fell 2%, arriving at $12.6 billion. Not surprisingly, revenue from the PC business declined 6% to $8 billion.

Impressively, however, Intel was able to offset this decline by posting a 7.5% gain in the data center business, which includes server processors. Bears are arguing that the company missed on earnings. But was it really a miss, especially since these numbers were in-line with management's prior guidance?

Besides, given the competitive gap and the mobile headwinds that have worked against Intel, the Street wasn't expecting much in this quarter. I also think that investors should keep these numbers in the context of where the company currently is, given the weak state of the PC market, which contributed to the almost 7% sequential revenue decline.

While I'm willing to excuse Intel's overall performance, prior concerns about margin leverage emerged. Gross margin posted a year-over-year decline of roughly eight points. Management said that the company was adversely impacted by higher inventory. The lower-than-expected utilization also hurt operating income, which dropped by almost one-third. But will things improve?

Focus and guidance

While I'm willing to give Intel the benefit of the doubt for this recent performance, the current state of the company can't be discussed without acknowledging how the company underestimated the mobile movement. This has caused processors based on technology from ARM Holdings (NASDAQ:ARMH) to steal opportunities Intel could have had in smartphones and tablets.

So even though the first wave might have passed the company by, it begs the question - can Intel's new leadership and presumably "a new focus" manufacture the sort of edge the company needs be competitive? But will investors be satisfied with that? Intel is known to be a leader, not merely a competitor. This is the question that investors must answer if anyone is considering placing a bet on the stock at these levels.

Still, it is hard to imagine that things can get any worse. On the other hand, stocks don't often do well during periods of leadership transition, either. Intel's OEM partner, Hewlett-Packard (NYSE:HPQ), serves as the perfect example. To that end, investors have to be pleased with the company's guidance, which calls for revenue of $12.9 billion, which was broadly inline with Street's estimated of $12.85 billion.

What does the future hold?

While assessing Intel's Q1 performance requires an appreciation of where the company is today, to make an investment case, investors have to look to where the company is going. In that regard, the obvious question is, what sort of traction can Intel gain in mobile? While the company is certainly moving in the right direction, there's still a lot that has to happen to overtake Qualcomm and Broadcom.

Having said that, Intel has some advantages that some of its rivals don't. Intel's significant R&D budget, which is expected to contribute to $19 billion in fiscal 2013 expenses, is one such example. But will that be enough? What's also working against Intel is that, regardless of how competitive Intel's new chips may compare to those on the ARM platform, device manufacturers such as Apple (NASDAQ:AAPL) and Samsung will still have to choose whether or not to give Intel the design.

What's more, given Intel's unfavorable market position, the company lacks the sort of leverage needed against Broadcom or Qualcomm to push margins higher. Intel would have to cut prices to drive revenue. Hardware manufacturers know this. The good news though is that expectations remain so low, Intel should be able to drive enough momentum to beat its numbers. That's not a glowing endorsement. But at this point this doesn't matter.

Here's making sense

The company has excellent fundamentals - including $18 billion in cash, while paying an excellent yield. At $22, this stock is trading at just 10-times fiscal 2014 estimates, which is more than one point below Intel's historical average. On the basis of free-cash-flow growth and the company's continued stock buyback program, these shares should reach $25 per share by the second half of the year.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.