Intel: Strong Upside Potential At $22

| About: Intel Corporation (INTC)

Intel (NASDAQ:INTC) recently announced plans to build a new research facility in Hillsboro, Oregon with a roughly $3 billion dollar project. This large investment into an R&D building signals Intel's commitment to follow the money as the industry transitions to fewer PCs and more mobile devices. Intel remains the leader in semiconductor chip development, and at a stock price under $22, I consider it a buy.

The PC industry is hurting. Tablets and smartphones are taking away the personal computing market. Companies like Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ) are struggling, while Microsoft (NASDAQ:MSFT) attempts to appease consumers with Windows 8 - which is geared more towards the mobile market. Intel, the leading chipmaker for desktops and laptops, however, has yet to take a large share of the mobile computing market. Intel still relies on the pc market for roughly 90% of its profit. It recognizes that this cannot continue and it has recently begun to make changes to become a player in the mobile chip market.

But investors must remember that there is still a market for PCs. Tablets are great for browsing the internet, reading books, listening to music, and watching videos, but for actual content creation, they are vastly inferior to a desktop or laptop. Businesses will continue buying PCs along with other content creators. That is a market mobile devices will not crack. Mobile devices are just not suited for such content and business use.

Additionally, PCs are much more competitive in developing countries such as India and China. Consumers in less affluent nations are much more price sensitive than those in the United States. Many PCs offer more functionality at a lower price than a tablet like Apple's (OTC:APPL) iPad, therefore drawing more consumers. Moreover, these countries have far more room for growth and will continue to produce revenues for PC makers and their components. Intel being a leader in the PC chip making field will actually benefit them because of these developing markets - and future growth is very strong.

Intel's position in the PC industry has led the market to undervalue it during this decline. But investors seem to discount the fact that Intel is one of the most innovative companies in the world and is poised to take advantage of shifting trends in technology. The company knows how to manufacture cutting edge semiconductors domestically as well as abroad. It is one company that truly has a commitment to new research and development and will remain a semiconductor manufacturing leader.

Intel can rely on PCs sales to fuel revenues in the near term, but it knows it needs to make a concerted effort in the mobile processor field in order to compete long term. The arrival of Windows 8, which Microsoft optimized for touch screen mobile devices, gives it a foot in the door. The high-end device of Microsoft's flagship tablet features an Intel i5 processor.

Companies such as Arm Holdings (NASDAQ:ARMH), NVIDIA (NASDAQ:NVDA), and Qualcomm (NASDAQ:QCOM) already have a head start in the mobile processor arena. ARM is currently the market leader. The company is a somewhat different from most semiconductor developers. Instead of manufacturing chips, it only designs them and licenses its patents to manufactures. This gives them the advantage of being able to move quickly with changing technology. ARM designs are present in nearly 95% of all smart phones.

NVIDIA, Qualcomm, and Samsung (OTC:SSNLF) are the leading chip manufacturers for mobile processors - most relying on ARM designs. However, the licensing deals with ARM significantly cut into margins. Companies must pay a licensing fee for each chip produced and sold.

As Intel becomes more competitive in the mobile chip market its margins will outpace those of ARM precisely because of these licensing fees. Because it will not have to pay licensing fees, it will be able to provide their product at a lower price while making higher profit margins. In the short run Intel needs the Microsoft Windows 8 mobile devices to do well, if this happens - as it likely will - Intel will already be in position to capitalize on this advantage.

Because NVIDIA licenses ARM designs it cannot move as quickly as Intel could in mobile computing. Intel is going to grab a significant portion of NVIDIA's market share by providing better technology at lower prices. Intel will essentially turn one of ARM's strengths into a weakness as we go forward.

Today, the market is undervaluing Intel on just about every metric. Lumping it in with PC companies like Dell and HP has a drastic effect on the stock price. However, the stock is currently trading at a 50% discount to its 5-year average P/E ratio. Its current P/E is less than 10 compared to about 64 for ARM and over 16 for NVIDIA. You also cannot ignore Intel's generous dividend yield, now at over 4%.

Another positive factor for Intel is that new competitors in the PC industry are unlikely, as it appears unattractive currently and has a high barrier to entry. Intel can safely focus on developing mobile chips without losing much ground in the PC-laptop market and still be able to see growth in the pc market in developing companies.

Intel is a very good buy. At a price around $22 it presents strong value. In the near term its price might be tied heavily to the success of Windows 8 and its mobile devices, but long-term, it is very solid and not dependent on one such technology.

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.