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.
Also on the conference call, Otellini said that volume growth, combined with a rich mix of products, drove record server revenue. Data Center Group sales grew 15% year-over-year, he added. Despite recent concerns over the impact of a slowing PC market, analysts still see plenty of growth catalysts looming on the horizon. In particular, Intel could receive a boost from Microsoft's ( MSFT) Windows 8 operating system when it launches later this year, tablets, and Ultrabooks, the new category of super-skinny laptops championed by the chip giant. "We continue to recommend buying the stock given the resumption of Data Center sales momentum, prospects for accreting gross margins, and the Windows 8, Ultrabook and tablet catalysts on deck for 4Q12 and 2013," explained Alex Gauna, an analyst at JMP Securities, in a note. "The downside risk represented by ARM ( ARMH)-based tablets is matched by the upside potential from the reinvigoration of mobile computing and Intel's own ability to participate with tablets and other touch-friendly devices." Gauna reiterated his market outperform rating and $33 price target on Intel shares after the report. Intel shares have gained almost 8% this year, lagging behind the Nasdaq's 13.18% gain. AMD's stock has tumbled almost 8% over the same period. -- Written by James Rogers in New York. Follow @jamesjrogers >To submit a news tip, send an email to: email@example.com. Check out our new tech blog, Tech Trends. Follow TheStreet Tech on your wireless devices.