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Why This Chipmaker Deserves To Be Bought, Now!

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I’ve heard some bearish comments lately on my favorite tech play, Intel (NASDAQ: INTC). These comments generally have to do with the declining demand for PC’s and questions about whether or not Intel can adapt to the changing computing landscape, particularly the shift toward tablet computing and other mobile devices.

One of my general philosophies about investing is that uncertainty creates bargains. It is this philosophy that allowed savvy investors to buy shares of Green Mountain Coffee Roasters for under $20 when the market was uncertain of the effect of the K-cup patent expiration, and sell them for over $40 when the next earnings report confirmed the company is still strong. I believe that Intel is a similar situation, though it may take a little more waiting in this case.

Intel has traded relatively flat over the past decade or so. In fact, exactly 10 years ago from the time of this writing, Intel was trading at $19.56, meaning that the shares themselves have risen just 10% in a decade. There have been some pops and drops since then, and a year ago Intel was approaching $30 before pulling back. However, in the past decade Intel has incrementally raised its dividend from 8 cents per share to 90 cents per share. At a current yield of around 4.2%, Intel has become quite a nice income stock.

Despite its labeling as a value and income play, I think Intel may be ready to break out to the upside over the next several years. For a long time now, the microprocessor industry has been completely dominated by Intel and Advanced Micro Devices (NYSE: AMD). AMD spend most of the early 2000’s improving their products and cutting prices and Intel suffered as a result. Intel, however, began to regain its market share when it introduced the “core” line of processors, the i3, i5, and i7 that are so popular for PC’s and laptops.

Intel has always been the clear leader, and it currently accounts for about 80% of microprocessors shipped worldwide. While thus far Intel has not been able to really break into the mobile segment, I believe it is just a matter of time.

As tablet computers and mobile devices such as smartphones add more features and capabilities, the need arises for more powerful and capable processors. Intel has the Atom processor, which is much faster than most mobile processors; however the challenge is power consumption, an area in which Intel has not been too competitive thus far.

What I think will be Intel’s ace in the hole is the prospect of becoming Apple’s (NASDAQ: AAPL) mobile processor supplier. According to a report by Reuters released last week, the two companies have been in talks over the past year on that issue, but are yet to reach an agreement. Apple is looking for alternatives to their current processors, which they design themselves but are manufactured by Samsung. Intel is the best in the business and I think Apple realizes this. Just because talks have been going on for so long doesn’t mean much. Apple has historically taken its time in making large-scale business decisions.

I also think that this type of a deal will benefit Apple’s shareholders, and I think the company knows this. There is no name more synonymous with quality in the chip-making business than Intel and the use of Intel processors in Apple devices like the iPad would be perceived as an upgrade from the current equipment, and may also lead to a bigger line of iPads, as they could conceivably be made with a variety of Intel processors, just like laptops.

In the microprocessor segment, Intel is the only viable investment. AMD’s share price has absolutely collapsed over the past year, and is 69.3% below its 52-week high at a time when the market is booming. AMD lost 16 cents per share and is forecast to post negative earnings for the next few years as well. While the company may indeed turn around, it is a speculative play at best.

Whether or not the Apple deal happens anytime soon, I still think Intel is priced right for an investment now at just 10.1 times TTM earnings. The consensus calls for a forward growth rate of just 5%, but I think this is a ridiculously low estimate, even if their mobile business stays the same. With the improving economy, both individuals and enterprises will have more capital to spend on new computing equipment, and 80% of that equipment, as mentioned, features Intel processors.

Matthew Frankel owns shares of Apple. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple and Intel. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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