For years, Intel (NASDAQ:INTC) and Advanced Micro Devices (NYSE:AMD) have been battling for supremacy in the PC microprocessor market. Right now, by many counts, AMD has the upper hand. Intel, long the powerhouse and technological leader, finds itself in the unfamiliar position of playing catch-up.
Add in Dell's (NASDAQ:DELL) recent announcement that it would be abandoning its "Intel only" stance, and all sorts of bad news keeps hitting the onetime juggernaut. That, along with a general weakness in the PC upgrade cycle, has knocked Intel's stock well in to the cellar, to levels not seen since the tech bubble deflated. With its main product line under fire and a key customer starting to defect, you'd have to wonder why anyone would consider investing in Intel.
Show me the money!
Here's the thing: While AMD may have the current technical upper hand, Intel is simply a stronger company. You can subtract Intel's total debt from its cash and short-term investments on its balance sheet and still have more cash-like assets in hand than AMD took in as total revenues over the last year. That means that Intel has significantly more flexibility to invest in research and development, fabrication improvements, and other technological innovations.
It also boasts a healthy 20.46% profit margin, whereas AMD's is an anemic 6.17%. That gives Intel even more breathing room, since less of each dollar of sales goes toward paying its current costs -- a situation that leaves more for research and other technological enhancements. AMD's current strength has been certainly been a wake-up call for Intel, but the sleeping giant has awakened, and it's fighting back.
The road ahead
While Intel has the resources to battle back, however, that fight won't be instant, or easy. But with its Conroe and Woodcrest chips, it has clearly announced that the news of its death has been greatly exaggerated, and that it's not giving up without a fight. Plus, as a price war with AMD looks likely this summer, I'd rather own the company with deeper pockets and stronger margins.
Fortunately, Intel's news hasn't been all bad. After all, Apple (NASDAQ:AAPL), a smaller but vitally influential player in the computer market, recently switched to Intel processors. For a company long famous for battling the "Wintel" duo of Intel and Microsoft (NASDAQ:MSFT), Apple's move speaks volumes about Intel's strength and market leadership.
Additionally, once Microsoft's next-generation Windows Vista operating system finally launches, companies and individuals alike will have a reason to upgrade. A major operating system change will likely drive new PC purchases, which could boost to Intel's flagging sales.
The investment case
Still, with a price war looming, its technological dominance challenged, and a partial defection of an extremely key customer, Intel is looking at an ugly near-term future. From the perspective of discount-minded investors at Motley Fool Inside Value, that makes it an intriguing company to consider right now. Often, the best time to buy is when a company possesses strong fundamentals and operations, but looks dubious on the surface. By the time things look better, the stock will most probably have already recovered, and those who bought when the future appeared dim will be rewarded. Almost nobody believes that Intel will simply vanish. Yet the way its stock has been pummeled recently -- down almost 40% from its year-ago levels -- you'd think the end were right around the corner.
Trading at about 13.9 times last year's earnings and 15.4 times next year's projected earnings, Intel's stock hardly looks pricey, even though the near future still looks rocky. Plus, with nearly $7.4 billion in free cash flow generated over the past four quarters, and $6.86 billion in net cash and short-term investments, the company certainly has a lot of financial muscle to weather a tough storm. Add in a decent 2.2% dividend yield, and even if the recovery takes some time, at least we investors are getting paid for our patience.
Intel's most rapid growth is behind it, but it will likely thrive well into the future. With its stock down, now may be the time to consider Charlie Munger's advice to buy a great company at a good price.
Think you're done with the Duel? You're not! Go back and read the other three arguments, and then vote for a winner.
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At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of Intel and Microsoft. Dell, Microsoft, and Intel are all Inside Value selections. Dell is also aMotley Fool Stock Advisorpick. The Motley Fool has adisclosure policy.
