By all appearances, Intel (NASDAQ:INTC) turned in a solid quarter.

Sales, net income, and earnings per share were up 14.7%, 16%, and 22.2% respectively. Considering the company's sales and net income figures are in the billions, that's solid growth. On the balance sheet, the company also managed to work down its inventory from a quite high $3.2 billion last year to $2.7 billion this year.

This inventory improvement is the most interesting aspect, because it seems to have come at the expense of margins. This adds a bit to the story that AMD's (NYSE:AMD) headway into Intel's business is a real cause for concern. AMD's microprocessor business is booming, and most observers believe it has a current and persistent technological advantage in the PC processor arena. As you look at Intel's increased sales and decreased inventory, that 3% drop in gross margins versus the same period last year is disconcerting.

This morning, I saw a number of comments attributing Intel's 5% stock slide today to its overly rich price and its failure to surpass estimates. That may be. Thankfully, I'm not in the business of trying to explain a one-day move.

But if I had to pick the most significant aspect of today's Intel news, I'd choose the competitive threats Intel faces, and its decline in margins, over its earnings. Yes, microprocessor sales were a record for the quarter, but that was helped by Microsoft (NASDAQ:MSFT) Xbox sales and a surprisingly strong PC market.

I'm not crazy enough to predict that Intel will lose its dominance any time soon. The company can use its very strong free cash flow to regain control of the market and its margins, and it should also have a decent amount of Apple (NASDAQ:AAPL) sales arriving in the next year. Still, I'd pay attention to those margins. Intel's been wrestling with its inventory for a while now, and while the company aims for gross margins in the 59% range, recent quarters show it's been a tough target of late.

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Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.