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Why Investors Should Be Eying Intel

Stocks in this article: INTC AMD MSFT ARMH

NEW YORK ( TheStreet) - Intel (INTC) may have lowered its full-year guidance when it announced its second-quarter results on Tuesday, but strong gross margins and competitive strength shouldn't be ignored.

The tech giant's shares were climbing nearly 3.5% to $26.26 on Wednesday as investors digested Intel's comfortable earnings beat and its 63.4% gross margin, which came in above the midpoint of its guidance.

Despite acknowledging a challenging macroeconomic environment, the Dow component expects gross margins to remain healthy. The Santa Clara, Calif.-based company predicted a third-quarter gross margin between 61% and 65%, and offered a full-year margin range of 62% and 66%.

"Bears have long argued that Intel's capex in next-gen capacity and a weak PC market would eventually crater gross margins," noted Bank of America Merrill Lynch analyst Vivek Arya, in a note. "However, 11 quarters and 2 chip manufacturing generations later, we see consistent gross margin execution within the company's 60% to 65% target band."

Arya has a buy rating and $34 price target for Intel.

Speaking during the company's second-quarter conference call, CEO Paul Otellini cited Intel's ability to ramp up manufacturing of its new 22-nanomenter Ivy Bridge chips as key to the company's improving margins.

"As we move into Q3, we now have the phenomenon where cost comes down rapidly on Ivy Bridge," he said, in response to an analysts' question. Intel, he added, expects to reduce its Ivy Bridge costs while doubling chip production volume compared to the second quarter.

The fact that Intel both designs and manufactures its own chips is hugely beneficial to the company's margins. Rival AMD (AMD), for example, which outsources its manufacturing, reported a non-GAAP gross margin of 46% during its first-quarter results earlier this year.

AMD, which slashed its second-quarter guidance earlier this month, expects its gross margin to be flat to slightly up in sequentially, when it reports after market close on Thursday.

Excluding items, Intel's gross margin was 64.4% during its second quarter.

Despite a fickle economy and increasing competition from design rival ARM Holdings (ARMH), Intel also enjoyed growth in its key PC and data center businesses during the second quarter, highlighting the firm's ongoing competitive strength.

Intel's Data Center Group, which provides chips for servers, saw its revenue climb 14% sequentially to $2.8 billion, while its PC Client Group revenue grew 3% to $8.7 billion.

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