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Don't Be Concerned: We've Seen This Intel Movie Before

Here's a shocker -- Intel (Nasdaq: INTC  ) announced earnings Oct. 16 that beat its revised estimates! If you've followed Intel for even a couple of quarters, you know it's the master of the earnings game. Intel is notorious for taking the brunt of lower-than-expected financial results early on by revising expectations. So, it should come as no surprise it beat revised estimates in Q3, nor should it be a shock that Intel's announcement was followed by dour Q4 guidance.

But, apparently news that Intel will miss analysts' fourth-quarter gross margin expectations was all investors needed to sell. Bad times, right? Not for value investors in need of an outstanding growth and income alternatives.

The specs
Intel's Q3 results were solid compared to its year-ago period, particularly when you consider the difficult PC and business environment. Gross revenue of $13.5 billion was flat, sequentially and compared to Q3 2011, but handily beat the $13.23 billion estimates Intel analysts had assumed. And, of course, the $13.5 billion in revenue topped Intel's revised figure, too.

Profits were up about 5% above Q2 of this year, though significantly lower than 2011. The $0.60 a share on a non-GAAP basis walloped the $0.50 analysts were expecting, and the aforementioned gross margins (the culprit for Q4's lower guidance) remained at 64%, a reflection of CEO Paul Otellini and team efficiently managing the business, in spite of a $500 million bump in R&D expenses.

As I've noted before -- and Intel certainly knows, too -- the lack of PC demand and its impact on Intel's chip making business will continue for old-school desktops. With that in mind, the 6% year-over-year revenue growth in Intel's data center group -- to $2.7 billion -- is what long-term growth and income investors should be focused on. The architecture group, specifically Intel's mobile computing solutions, generated $1.2 billion in revenue in Q3, up 6% from the previous quarter. So what's the big deal?

Intel's data centers and cloud computing products, along with chips designed for mobile applications, are the future, and these business lines must continue to drive future growth. The nearly $4 billion in revenue Intel garnered from the data centers and architecture business lines in Q3 may not seem like much, but these are critical results prospective investors need to consider.

The opportunity
The immediate impact of longtime partner Microsoft's (Nasdaq: MSFT  ) release of Windows 8 may provide a muted bump in consumer sales, according to Intel CFO Stacy Smith. A plethora of new touchscreen Ultrabooks, along with Intel smartphone chips that are hitting the marketplace right on schedule, also bode well heading into 2013.

As for cloud computing, which is expected to be a $241 billion market by 2020 according to Forrester Research, Intel's revenue is up 50% in this key area compared to 2011. Intel is hardly alone in recognizing the importance of cloud computing, of course. Microsoft certainly gets it, as does IBM (NYSE: IBM  ) , an industry leader in cloud computing solutions (among other IT-related markets), as discussed in an article last week.

Intel's capital spending is expected to be around $11.3 billion for the year, down from the $12.5 billion initially forecast. In a difficult market, reining in expenses is rarely a bad idea. Managing overhead, along with generating anything close to Q3's $3.8 billion in operating cash flow, is more than enough to drive continued product and technology advances across critical business lines.

The post-announcement easing in Intel's share price is a gift for long-term investors in need of income -- Intel offers shareholders a 4.15% dividend yield -- and substantial growth. Intel remains one of the least expensive investment options in the industry, has outstanding margins relative to its peers, and a management team led by CEO Paul Otellini that's second to none. So, ignore the Intel earnings gamesmanship; it remains the cream of the crop.

If you're looking for more guidance on whether you should buy Intel, our technology analyst Andrew Tonner runs through all of the key topics investors should understand about the chip giant in our new premium report. Better yet, you'll continue to receive updates as news develops for an entire year. Click here now to learn more.

Tim Brugger has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines, Intel, and Microsoft. Motley Fool newsletter services recommend Intel and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Tim Brugger

Tim has been writing professionally for several years after spending 18 years (Whew! Was it that long?)in both the retail and institutional side of the financial services industry. Tim resides in Portland, Oregon with his three children and the family dog.

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