Reasons to buy Intel for the long term

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Barron's in its October 22 issue is boldy proclaiming the death of the PC. The article goes on to state the obvious shift in consumer preferences from PCs to smartphones and tablets. Intel ) and Microsoft ) represent the old guard in the PC order that is facing declining revenues. Both are relatively cheap, with Mr. Market basically having discounted them for the decline in revenues to come. Of the two I believe the better buy is Intel.

Intel's PE ratio is now below 10 with a dividend yield over 4%, while Microsoft has a PE ratio around 15 and a lower yield at about 3.1%. Both companies have strong balance sheets with lots of cash and low debt. They still get good cash flow from their current PC business and can maintain and increase their respective dividend yields.

Microsoft is relying on growth on Windows 8 which will power their smartphone and tablet strategy as well as add to the upgrade cycle to their PC sales. While it may be a good product, the market has clearly been turning to iOS from Apple ) and Android from Google. Both Apple and Google have first mover advantage and will be difficult to dislodge since their app ecosystems are well established over the newcomer into the space, the venerable Microsoft. Most of what Microsoft offers is being offered in a better, cheaper and more convenient way by both Google and Apple.

Intel on the other hand is clearly a force to be reckoned with in terms of adding circuits into silicon. I predict that despite competition from ARM Holdings ), it will eventually catch up in the smartphone and tablet world by making lower power, faster processors through sheer force of resources. For the longest time Apple resisted using Intel in its computers, instead relying on IBM and Motorola, but eventually Intel won by continuing to make incremental improvements in its silicon. Intel also is growing well in the server space with the growth of cloud computing services. ARM designs the chips and others manufacture them, while Intel can provide an end to end solution.

Intel will benefit from the upgrade bump from Windows 8, but as it moves to tablets, smartphones and servers it should thrive and resume some modest growth after the next 2-3 quarters of transition. Given the very inexpensive valuation and the juicy yield, I do think there is little downside to owning Intel for the long term, and likely a 25-50% upside over the next 1-2 years.

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Fool blogger Erick M. Santos, M. D., Ph.D. owns shares of AAPL, GOOG, ARMH and INTC. He owns no shares in MSFT. The Motley Fool owns shares of Apple, Intel, and Microsoft. Motley Fool newsletter services recommend Apple, ARM Holdings, Intel, and Microsoft. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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