Buy Intel Before Windows 8 Releases

| About: Intel Corporation (INTC)

Intel (NASDAQ:INTC) is currently one of the most appealing stocks in the tech sector. Amongst its peers, Intel is undervalued and has the greatest potential for capital appreciation alongside organic growth in the medium term. Current shareholders should hold long term while interested investors should buy before Microsoft (NASDAQ:MSFT) releases the new OS, Windows 8. Intel will benefit as several desktop PCs, tablets and smartphones begin to carry the new Microsoft OS. Intel may eventually form a partnership with Google (NASDAQ:GOOG) in the future as its Medfield chip was used for Motorola's new Razr i. Intel's fourth generation of chips will create new capabilities in personal devices like face, palm and gesture recondition for access and security that will be unrivaled in the industry.

Intel's recent earnings release showed it was able to sustain revenue and earnings despite macroeconomic headwinds and soft demand in multiple industries. Intel's second quarter net revenue increased to $13.5 billion from $13 billion, YOY and $12.9 billion sequentially. Second quarter cost of sales decreased to $4.94 billion and accounted for 36.6% of net revenue. Operating income decreased to $3.8 billion and accounted for 28% of net revenue. Intel's second quarter net income decreased to $2.8 billion and accounted for 20.9% of net revenue. Intel's long-term debt was flat from 2011 fiscal year end and totaled $7.09 billion at the end of the first half of 2012. Cash equivalents increased to $5.2 billion from $4.6 billion, YOY. Intel's PC Client Group accounted for $8.6 billion of net revenue and $3.4 billion of operating income. The Data Center group accounted for $2.8 billion of net revenue and $1.38 billion of operating income.

Increases in revenue were due to strong enterprise and emerging market demand, partially offset by weak consumer demand. Data Center revenue increased due to the growth in devices connecting to the internet, thus increasing demand for cloud infrastructures. Asia-Pacific accounted for 58% of net revenue while the Americas accounted for 21%. The second quarter launch of third generation family processors known as Ivy Bridge is expected to increase sales for ultrabook systems in 2012. Intel-based smartphones from three different carriers outside the US were also launched in the second quarter. Intel lowered its projected revenue growth for 2012 to 3% to 5% due to slower than anticipated recoveries in the US and Europe. Intel also lowered its third quarter projected revenue to $13.2 billion due to macroeconomic headwinds, slower growth in emerging markets, and more softness in the PC enterprise market than usual.

Many investors are down on Intel because it seemed late to enter the mobile computing market. The most comparable competitors in this sector are Qualcomm (NASDAQ:QCOM) and ARM Holdings (NASDAQ:ARMH). It also helps to follow Microsoft's metrics and headlines as they will be strong indicators of Intel's success in the near term. Intel's market cap is around $115 billion, higher than Qualcomm's $110 billion and ARM Holdings' $12 billion market share; Microsoft's around $236 billion. Intel's stock price is lower than all the aforementioned firms. Intel's price is around 9.8 times earnings, also the lowest among these firms. Microsoft's around 15 times earnings, Qualcomm's around 21.6 times earnings and ARM Holdings' price is 56 times earnings.

Intel's 2.13 price-to-sales and 2.38 price-to-book ratio are also the lowest amongst these firms. ARM Holdings' five year sales growth was around 13.3% while Qualcomm's was around 14.7%, Microsoft was around 7.6% and Intel was around 8.82%. Intel and Microsoft's sales in the past quarter, YOY were under 4%, ARM Holdings was around 15% while Qualcomm was around 27%. These metrics show that Intel and Microsoft have the opportunity to double or triple their sales growth if successful under the strong growth of the mobile computing sector. Intel's EPS is $2.36, ARM Holdings is $0.50, Microsoft's EPS is $2.00 and Qualcomm is around $2.97. Intel's annualized dividend is $0.90; Microsoft's around $0.80 while Qualcomm's around $1.00 and ARM Holdings' just $0.16.

Intel's return on equity is 25%, Microsoft's around 27%, Qualcomm is around 17.5% and ARM Holdings is around 13.5%. ARM Holdings' 35% operating margin and Qualcomm's 27% profit margin are the highest among the firms. Intel is around 500 bps lower in each metric - the mobile computing market is high growth but high margins as well. Intel is the only stock trading at a deficit - down 11% for the month and down 2% YTD through late September. Intel is trading at 20% below its 52-week high, it's the furthest away amongst these firms. Intel's average daily volume is around 38.7 million, Microsoft is close behind at 36 million and Qualcomm is around 10.7 million. Intel has the highest beta score but is still close to one. Intel's stock is down 8.7% since the last earnings report.

Beyond the iPad, the tablet market has yet to develop or mature. Windows 8 will bring in several different models of tablets, convertibles, hybrids and ultrabooks that will offer more functional models for enterprises and consumers as well. Intel recently hosted an event where several device makers including HP (NYSE:HPQ) and Samsung unveiled new innovative products that will utilize Intel processors and Windows 8. By the end of 2012, around 70 ultrabook models will be available at half the price of 2011, 40 of these will be convertibles. Dell (NASDAQ:DELL), Sony (NYSE:SNE), Toshiba (OTCPK:TOSBF), Acer, and HP are just some of the models that will release Intel-based convertible Windows 8 devices.

Intel's fourth generation core processor family known as Cloverfield is projected to launch in 2013. This line is focused on even less power, doubles the battery life of Ivybridge, and is more geared for mobile computing. Intel is focused on increasing both the connectivity of devices and energy efficiency as well. Intel is focused on innovation like upgrading WiFi to WiGig, Smartconnect to enhance data communication and transfers, and Client Based Authentication Technology to increase security and improve usability on standard devices. Intel's new processors will power an era of touchscreens, gesture-based computation, biometric scanners, and advanced wireless networking platforms for personal devices while utilizing HTML5 and free development kits for optimum transparency among developers. No one can match Intel's portfolio and scalability, its third and fourth generation processors can drive substantial growth by enabling these innovative technologies.

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.

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