When it comes to the technology industry, I find that the general scenario is that companies - even leading ones - are either a hit or a miss from an investment perspective. Perhaps my most bullish case was presented for Microsoft (NASDAQ:MSFT), where I argued that the OS-giant is well positioned to unlock synergistic value through cloud integration (finally!). On my more bearish side, I have argued that Dell (NASDAQ:DELL) will experience stagnating growth and suffer through poor R&D expenditure and that Apple (NASDAQ:AAPL) is undergoing an investment craze that roughly mirrors its faddish market. Between these two extremes is Intel (NASDAQ:INTC), a semiconductor-maker that is experienced strong secular growth despite a poor economy.
The company is noted for designing integrated circuits for computing and communication, but has established a strong foothold in other critical areas ranging from various computing components to servers to the new Ultrabook. The fundamentals of these areas are strong, reports CEO Paul Otellini:
I'm very pleased to report another record revenue quarter for the company. In May, we met with many of you at our annual investor meeting, and laid out our strategy and the opportunities we have before us. The transit of driving the growth of our business that we described then are playing out as expected. The Data Center business remains strong, our Embedded business is seeing rapid growth, the Enterprise PC refresh continues, and the emerging markets continue to be significant drivers of our broad based momentum.
In the comparison of our second quarter results versus Q2 of last year, we saw strong double-digit revenue growth across every business segment. For example, the Data Center business is up 15%; Embedded is up 25%; NAND is up 15%; and our PC Client business is up 11%.
If we look at the channel, which is an excellent proxy for emerging markets strength, our channel revenue was up 17% versus last year. In summary, this was a very strong quarter across all of our product lines and around the world.
These are impressive numbers for the mature technology firm. PC unit growth may be in the range of 9% to 13% and stands to benefit from increasing demand for the Ultrabook. While Intel was not successful in the tablet and smartphone markets, this new product - at a current market price of as much as $1,700 - exposes the firm to value-creating opportunities that can be leveraged to aid sales in other segments. CPU revenues were above $2B for three consecutive quarters and remain fundamentally strong. At the same time, headwinds in Europe (especially where lower consumer expenditure is concerned) will keep production limited in the coming months, although I see this as ephemeral from a value investing perspective.
Demand is also proving strong for Sandy Bridge processors while Intel's Data Center Group, in my view, is not being properly valued by the market compared to peers. Many are forgetful that the segment goes beyond providing servers. Indeed, microprocessor shipments rose by a staggering 38% from last year and stand to further benefit from new mobile and Internet solutions.
One large risk comes from likely higher input costs and raw material volatility, which will eat away at the bottom line. Accordingly, I model gross margins declining from roughly 66.1% in 2010 to around 62.8% in 2012. SG&A as a percent of sales will be roughly flat during this same time period.
With the company trading at only 10.8x and 9.7x past and forward earnings, respectively, and offering an impressive 3.6% dividend yield, Intel provides favorable risk/reward for value investors, growth investors, and income investors. Consensus estimates for EPS are that it will grow by 15.1% to $2.36 in 2011 and then by 3.8% and 4.5% in the following two years. My own model forecasts revenue growing by 12.4% to $52.4B in 2011 and then by 3.9% in the following year.
In conclusion, I see Intel as both a strong and safe investment - an exception to my general outlook on the technology industry. With leading market share in servers and a plethora of cross-selling opportunities, Intel is well exposed to upside, if at all limited to white-box server competition. Although it performed more than 11 percentage points worse than the NASDAQ since 2008, I anticipate this trend changing due to an increased understanding over the business and new opportunities.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.