Intel: Undervalued Blue Chip

Intel (Nasdaq: INTC  ) came through with yet another record quarter after a record year. The dominant force in semiconductor chips blew away revenue and earnings estimates during the first quarter, putting the company in position to grow revenues 20% this year.

Revenue for the first quarter grew an incredible 25% from a year ago, to $12.8 billion. Earnings per share increased 30%, coming in at $0.56 a share, zooming past consensus estimates of $0.46.

What's interesting is the growth in the company's datacenter group, which provides chipsets for servers and high-performance computers. That segment enjoyed a 32% boost in sales from last year, to $2.5 billion. Besides computers, devices such as smartphones and tablets have to communicate with servers on the ground. Intel is part of the big trend in cloud computing. The company sees this as its growth engine in the years to come.

The majority of revenue comes from chipsets that go into personal computers. Its PC client group had $8.6 billion in revenue, up 17% year-over-year, which exceeded expectations. Analysts seemed fixated on low demand for PCs in the U.S. and Western Europe. But strong demand in emerging markets was better than expected. Emerging markets are 50% of its total business. The gap between the desire for technology and affordability in these markets continues to close for 2 billion consumers in Latin America, China, and Eastern Europe.

Keep an eye on the PC and enterprise server upgrade cycle. According to the company's figures, about 75% of the enterprise PC market is still running Windows XP. The industry is in the early stages of a three- to four-year refresh cycle as the Microsoft (Nasdaq: MSFT  ) Windows 7 rollout continues. When asked what inning he thought we were in for the enterprise server upgrade cycle, Intel CEO Paul Otellini replied, "Top of the fourth, three on, and no outs."

The company has yet to show substantial progress supplying chips in wireless devices such as tablets and smartphones, but it will have more specifics in May. So far, it has 35 design wins in the tablet space under its belt. Intel will be the new kid on the block here, but its track record says it can grab some market share from established players rallying behind designs based on ARM Holdings (Nasdaq: ARMH  ) chip architecture.

Intel's valuation is compelling. Trading at 11 times 2010 earnings, the stock looks cheap based on 2011 analyst estimates of $2.28 in earnings per share, an 11 % jump. That is a PEG ratio of 0.80. The dividend yield now stands at 3.3%, and I discussed its merits here. Intel is well-run, as its excess cash was used to complete a $4 billion stock buyback on the cheap.

Intel has momentum that continues to build with a stock that is still undervalued. The company has been taking advantage of trends in cloud computing, smartphones, and the burgeoning tablet market. Management has also been effective as they are getting excellent returns on investment, evidenced by the company's record numbers, and its stock buybacks have been done at cheaper prices. Add it all up, and it's a great time for investors to put some chips on the table.

To stay updated on all things Intel, add the company to our free watchlist service today:

Fool contributor Jonas Zamora has a beneficial long interest in Intel and ARM Holdings . Intel and Microsoft are Motley Fool Inside Value picks. Intel is a Motley Fool Income Investor pick. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended a diagonal call position on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Microsoft. Alpha Newsletter Account, LLC owns shares of 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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  • Report this Comment On April 28, 2011, at 3:41 PM, DanCobb wrote:

    Motley Fool and the rest of the analysts are finally discovering what many of us have known for a couple of years. Intel is positioned so well that even at $50 billion in revenue a year, it could easily see growth of 20% for the next several years. Intel sells CPUs into the servers that ALL MOBILE DEVICES access worldwide. Intel's CPUs dominate in performance and power in all segments except smartphones, and that is about to change. Getting to this place takes unequalled world-leading technology and manufacturing excellence. The company is incredible.

  • Report this Comment On April 28, 2011, at 3:46 PM, DanCobb wrote:

    I forgot one thing: superior management. Intel's management is envied around the world. Do I own Intel stock? I would be foolish not to.

  • Report this Comment On May 01, 2011, at 10:38 AM, ChartwiseJZ wrote:

    Appreciate your comments Dan!

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