Tickers in this Article: INTC, QCOM, AMD, ARMH
Wall Street is infamously myopic with companies and stocks, and that obsession about the next quarter seems even sillier in the case of a stock like Intel (Nasdaq: INTC). The real question investors need to ask themselves is not whether Intel can beat third quarter estimates, but rather if the company can really gain meaningful share in the mobile market and/or whether the company's manufacturing and technological capabilities will translate into meaningful market share and cash flow. I do expect Intel to “stay in the game” as it were, but I don't see a particularly compelling case for owning the stock.

Second Quarter Results Come In Okay
Intel's reported results for the second quarter were basically okay. Revenue fell 5% from the year-ago period, rose 2% from the first quarter, and only barely missed the average sell-side target. The weak PC market was once again the primary source of the weakness, as PC group revenue declined 7% from the year-ago level. Data center revenue was down slightly (-2%), while “other” fell 15% and software rose 4%.

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Margins were also basically fine, at least relative to expectations. Gross margin was a little better than expected at 58.3% (down about five points from last year, but up almost two points sequentially). Operating income fell 29% (and rose 8% sequentially), but ended up only just slightly below expectation.

Slight Tweaks To Guidance
Intel's guidance for the next quarter followed the trend of this quarter – slightly lower revenue and slightly higher gross margin. Absent a big turnaround in the PC business, and there's nothing from Dell (Nasdaq: DELL) or Hewlett-Packard (NYSE: HPQ) to suggest that, it's hard to see too much scope for a big outperformance. I suppose back-to-school shopping could help, but getting the ultrabook concept going is probably the biggest near-term potential driver.

The Long Game Versus The Short Game
To be honest, I have a hard time getting too worked up about the near-term prospects for Intel. The company continues to generate an overwhelming portion of its revenue, operating income, and cash flow from the PC business, and I don't see what AMD (NYSE: AMD) can do about that at this point in the game.

The bigger question is what Intel can accomplish in the mobile space. Companies like Qualcomm (Nasdaq: QCOM), Samsung, and MediaTek have a substantial lead, but Intel has been investing considerable resources in its technological and manufacturing capabilities. I'm not going to get into a debate over the picayune details of performance benchmarks, other than to say that it looks like Intel's future chips may have a meaningful edge on ARM-based (Nasdaq: ARMH) chips. Coupled with what could be some impressive and cost-effective high-end manufacturing capabilities, there is at least the chance that Intel can break into top ranks of market share in phone/tablet application and baseband chips.

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My concern, though, is what that will ultimately be worth. I think Intel represents a threat to companies like Nvidia (Nasdaq: NVDA) and Broadcom (Nasdaq: BRCM), but I'm not sure the company can unseat Qualcomm and/or Samsung. Moreover, while phone developers like Apple (Nasdaq: AAPL) and Samsung are near-fanatical about costs and power consumption, developers have an incentive to make sure that no one company can re-establish anything like the “Wintel” dominance of old.

The Bottom Line
I do believe that Intel will be able to offset declines in the PC business with growth in the mobile business, but I struggle to see a scenario where Intel becomes a real growth company again. To that end, I'm comfortable with a long-term revenue growth target in the 3% to 4% range, and a free cash flow growth target of about 6% to 7%. With that, fair value would seem to be around $25.

I think a $25 fair value makes Intel a decent hold. There's certainly upside potential if the company does better than I expect in mobile, and shareholders can collect a decent dividend along the way. On the other hand, I'm not sure this is the stock to pick for major near-term capital gains potential.

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