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Intel: Smaller Is Better

Moore's Law, coined by Intel (Nasdaq: INTC  ) co-founder Gordon Moore, states that on average, computer chips' power will double every 18 months, relative to their cost. On Wednesday, Intel announced that it had successfully extended Moore's Law for at least another two years by demonstrating a working chip manufactured with next-generation 45-nanometer technology. The prototype is expected to be in full production by late 2007.

The nanometer scale describes how far apart elements can be successfully placed on a computer chip; the smaller the scale, the more circuits can be packed onto a single chip, and the more powerful the chip becomes. Considering that the semiconductor industry is just now scaling up to the 65-nanometer level, 45 nanometers might not seem like a big deal. But I believe it represents an excellent buying opportunity for long-term investors, for three reasons.

First, the new chips will help Intel blunt its recent losses in market share to Advanced Micro Devices (NYSE: AMD  ) . The advancement will push the number of transistors Intel can place on a chip to over 1 billion. These new chips will be faster, use less power, generate less heat, and provide a 20% increase in switching speed, which will likely make them ideal for a host of new applications.

For instance, less power-hungry chips will improve the battery life for mobile devices, which should greatly interest manufacturers and consumers alike. Faster chips will also make it easier to download, transfer, and play back videos and movies. The 45nm chips should help Intel capitalize on the growing transition of mass media from TV to computers.

Second, the news suggests that Intel's lead in producing 45nm chips could be as large as six to nine months. AMD chips will definitely remain competitive, and certain users are likely to prefer AMD's technology for a variety of reasons. But in an industry where the doubling of performance every two years is imperative, a six- to nine-month lag could put AMD at a distinct disadvantage.

Lastly, the new chip will cut production costs. When Intel's new 45-nanometer plant becomes operational, the facilities are expected to use 40% less energy and water than existing ones. They will also manufacture chips with 300mm wafers instead of 200mm wafers. Both factors will dramatically increase the company's ability to produce semiconductors at a lower cost.

The news won't immediately stem Intel's market-share losses or ignite a rally in its stock price (which has fallen 16% since the first of the year), but it will certainly keep the heat on AMD. It also provides a compelling reason for patient investors to consider buying Intel shares.

We've chipped in further Foolishness:

Fool contributor Jack Uldrich has been thinking small since grade school. He is the author of two books on nanotechnology, including the forthcoming Investing in Nanotechnology: Think Small, Win Big. He owns shares of Intel. The Fool has an ironclad disclosure policy.

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