Seeking Alpha
Profile| Send Message|
( followers)

Chip maker Intel (NASDAQ:INTC) has moved into a tight competition with Qualcomm (NASDAQ:QCOM). Both companies have a similar valuation around $120 billion, but Intel is under-valued. Intel stock is trading near $24, which is 13 times earnings, but should be closer to $30 based on fundamentals. Intel has a gross income margin of over 60% and has been working to increase revenue streams to counter declining PC sales, in which Intel chips still dominate.

Modest Q3 Earnings

For the third quarter of 2013, Intel posted 5% year-over-year growth with $13.5 billion in revenue. Revenue also increased 5% from the previous quarter. Within its group of PC clients, however, revenue declined by 3.5%, as PC sales are expected to continue slowing down.

The key bright spot to the report was that their Data Center earned record revenue of $2.9 billion, which was a 12.2% increase from the previous Q3. This growth was fueled by cloud, storage and high performance computing. This segment is important since 20% of Intel's revenue comes from servers as ARM (NASDAQ:ARMH)-based chips are entering the server market. During the quarter the company paid dividends valued at $1.1 billion and bought back $536 million in stock (24 million shares).

Other key metrics showed healthy growth with operating income, net income and earnings per share up substantially. Net income grew to $3 billion vs. $2 billion from the second quarter. Guidance for Q4 is 2% revenue growth to $13.7 billion with spending comparable to Q3, at $4.7 billion. Gross margin is expected to remain at 61%. CEO Brian Krzanich says earnings came in as expected while the company increases its focus on ultra-mobile devices, networking and 2 in 1 systems.

Intel Enters Mobile Competition

Intel continues to be very profitable with a net income of $11 billion, nearly twice that of Qualcomm. Part of the reason valuations have been similar involves Qualcomm's success in the surging mobile-computing market. Intel, however, has designed more efficient and faster processors called x86 Atom quad core Bay Trail for tablets. They are also designing chips for laptop/tablet hybrids. Although Intel has been overshadowed by ARM-based chips used by Qualcomm and Samsung (OTC:SSNLF) in the tablet market, it appears Intel is ready to be a mobile player. Intel's x86 processor outperforms ARM-based chips in terms of battery efficiency.

Microsoft (NASDAQ:MSFT), which has also been eclipsed in the mobile revolution by Google's (NASDAQ:GOOG) Android and Apple's (NASDAQ:AAPL) iPhone and iPad, provides a steady income stream for Intel, using the Bay Trail processor for its Windows 8.1 tablets. Intel will be providing low priced Android tablets with Bay Trail processors. The cheaper tablets will likely be embraced in countries such as China and India as well as Latin America. At the same time Intel is working on a more efficient Bail Trail version for smaller smart phones. Qualcomm is currently the leading semiconductor company for smart phones, powering Androids and parts of iPhones.

New Development

Since August 2013, Intel has released over 40 new products for various market segments, including ultra mobile devices and data centers. Fifteen of these products are 22 nanometer Atom System-On-Chip processors for tablets and the cloud. They have also launched a new division to manage "Internet-of-Things" projects in which digital technology is entering areas of the physical world that were unimaginable a decade ago. Since Intel has only penetrated about 5% of the global tablet market, the company is working on expanding its market share with chips for lower cost tablets. But recent demonstrations of Intel's chips for Android show that bugs still need to be fixed.

Intel will be adding a new revenue stream to counter declining PC sales by developing new more efficient 64-bit chips for Altera. The new high performance processor for Altera using ARM Cortex-A53 technology will be available in late 2014. This development will unlikely be household news since it pertains to the server market.

The Future of Intel

Investors who have hung on to Intel the past three years may be frustrated that the stock is right where it was in 2010, but those who bought in early 2013 are enjoying growth from $20 to $24. The stock reached as high as $28 in the Spring of 2012, and it has been locked in a narrow trading range for nearly a decade. The last time the stock traded above $30 was in 2003.

It is not likely Intel will climb significantly higher than its levels from a decade ago anytime soon. But the company has sound fundamentals and is beginning to innovate for the mobile device market. For investors who bought at rock bottom levels of $12 in 2008, the stock has doubled and is unlikely to fall to recession lows. With steadily growing assets on the balance sheet, now over $90 billion, Intel appears to be a stable investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Source: Underpriced Intel Reinvents Itself For Mobile