For a company that has lost about 20% of its market value since the start of 2008, Intel (Nasdaq:INTC) is sitting pretty. The computer chip giant's first quarter wasn't the disaster many pessimists expected. In fact, Intel beat Wall Street's earnings estimates and topped revenue targets, and, even better, expressed plenty of optimism about the coming quarters. Based on the way things are headed, I'd say the stock is a lot stronger than people think.

New Information Released
By the numbers, revenue climbed 9% higher to $9.7 billion, while operating profits soared 23% higher to $2.1 billion. Earnings fell by 11% over last year to 25 cents per share, but that was the result of a larger tax hit this quarter and a 4-cent-per-share knock for restructuring and asset impairment charges.

As for the outlook, Intel said revenue in the second quarter will be $9.0-$9.6 billion. That range translates into a sequential dip, but the midpoint is just ahead of $9.2 billion which is what Wall Street has been projecting. Intel is expecting gross margins to improve sequentially during the second quarter, and even more in the second half of the year.

Positive Changes
That expansion of gross margin ought to give investors cause for celebration. It proves that Intel, operationally, is on top of its game. After firing about 14% of its workforce in two years, shearing costs and shifting to more efficient manufacturing, Intel is now a much leaner machine, and positioned for rapid growth in emerging personal-computer microprocessors markets where the likes of Hewlett-Packard (NYSE:HPQ), DELL (Nasdaq:DELL), Lenovo Group (OTC:LNVGY), Apple (Nasdaq:AAPL) and other computer makers, which look set for robust sales growth rates this year,.

Don't forget, Intel gets about three-quarters of its revenue from outside the U.S. Strong foreign currencies and a weak dollar represents positives and negatives for Intel. With Intel chips priced in dollars, a lower dollar drives up chip demand overseas, providing Intel with further insulation from a slowing US economy. On the other hand, the lowered purchasing power of the American dollar increases the total costs.

Divide (Yourself) and Conquer

Of course, the computer memory sector isn't a great place to be doing business these days. But earlier this year Intel wisely spun off most of its flash memory operations into Numonyx, a privately held joint venture with STMicroelectronics (NYSE:STM), reducing its exposure to the troubled memory space.

I would wager Intel will extend its already hefty lead in PC microprocessors at the expense of it main competition in the area, Advanced Micro Devices (NYSE:AMD). Intel had about 76% market share in Q4 of 2007 compared to 23% for AMD. By gaining market share, Intel could offset any shortfalls from a weaker PC market and still lift its earnings. Intel, with its lower-cost chips, might win even more share if the U.S. economy's woes hit the PC market because consumers might be looking for cheap computers.

Intel's forward price-to-earnings multiple of 15 is in line with the company's reasonable 14-15% expected earnings growth next year, not including any new market share gains taken from AMD. At a share price of $22, Intel trades at about 15 times the $1.50 EPS that analysts reckon it will produce in 2009, well down from the 19 times the stock fetched back in late October.

Bottom Line
If Intel shares can make their way back to that 19 multiple, it would mean upside of 19% for investors. Meanwhile, Intel's downside risk is minimal given the company's dominant market position, impressive operating leverage and international expansion opportunities. Even a cynic like me has to admit that Intel looks pretty attractive right now.

Related Articles
  1. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  2. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  3. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  4. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  5. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  6. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  7. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  8. Investing News

    Corporate Bonds or Stocks: Which is Better Now?

    With market volatility high, you may think it is time to run for corporate bonds instead of stocks. Before you do take a deeper look into which is better.
  9. Mutual Funds & ETFs

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  10. Investing Basics

    How to Diversify with International Stocks

    Diversifying with international stocks can benefit most portfolios, but beware of country risk.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!