Strong Earnings Give Intel an Edge Over AMD

The major player in its business segment, Intel (INTC) was expected to set a direction for technology early in this earnings season. And set a direction it did as the company beat expectations and saw its shares move higher in after hours trading. Intel came down the pipeline first, and the computer chip maker left nothing to chance this quarter as sales continued to be strong and CEO Paul Otellini projected further strength ahead.

Intel was able to put a number together this quarter that reflected double digit sales growth for the first time in years. First the numbers. Income was up to $1.8 billion or $0.31/share vs.$1.3 billion or $0.22/share a year ago (representing an increase of 40%.) Revenue was up to $10.1 billion, which represented an increase of 15% year-over year. The all important margin issue that had plagued Intel for much of the past 12-16 months seems to be forgotten as the company has stepped completely ahead of Advanced Micro Devices (AMD) and into its formerly-held dominant market position.

Due to heavy price wars with AMD, Intel's margins were dropping quarter after quarter, and as a result, the stock price went stagnant. However in the past two quarters this story changed and Intel proved once again that it has market power when it comes to selling processors. Gross margins at the company rose slightly again and the expectation for the 4th quarter is that Intel will be able to nudge them even higher still to above 55%.

Analyst estimates had called for more conservative margin numbers leading to $0.30/share and $9.6 billion. Intel handily beat those figures as demand for the company's products were heavy due to increasing laptop use. The very successful Core 2 Duo line proved a winner again as computer makers like Hewlett Packard (HPQ) and Apple (AAPL) are stuffing the chips in their systems left and right.

A quick look over at Amazon's best selling computers list has four Apple machines in the top five, all sporting Intel's Core 2 Duo chip sets. Hewlett Packard holds six of the next 10 spots with four Intel powered systems and two AMD powered systems. In total, of the top 15 true laptops on Amazon's list, 12 run on Intel chip sets. Now that's dominance in a sector that is growing much faster than traditional computer desktop systems.

The company guided even higher than previously for the 4th quarter, now expecting sales between $10.5 billion and $11 billion; analysts were expecting $10.4 billion.With the way the computer industry is growing, especially in the laptop sector and emerging markets, it's the hardware that will continue to sell and sell well.

With all the fuss about software piracy, the makers of the nuts and bolts, so to speak, will continue to be strong. While in the Far East piracy runs rampant as the computer market continues to expand, the difficulty involved in illegally copying chip design and computer design innovations is paramount to the tasks involved in copying software.

The bottom line is, Intel dominates its marketplace, it is the brains behind the most popular systems being sold today and we are coming to an era of computer innovation during as customers are becoming excited again about what their systems look like and what they can do. For the rest of the year and beyond, this shines a particularly bright light for Intel.

Disclosure: Author is long AAPL, INTC