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You're Ignoring the Best Bargain in Tech's Hottest Sector

Written by Subject: Technology: Computer Hardware
You're Ignoring the Best Bargain in Tech's Hottest Sector
"What on earth is an exabyte?"
That was my first thought as I listened to Intel's CEO, Paul Otenelli, talk about the company's quarterly results last week. He'd just informed the crowd that a total 245 exabytes of data had crossed the Internet during 2010.
An exabyte is a billion gigabytes. Add up 245 of those... that's beyond most people's imagination. Let's say the average movie download is about one gigabyte, 245 exabytes equals around 245 billion movie downloads.
It's mindboggling. And that number is going to keep growing. The best part is, it will never stop. Calling it a multidecade trend doesn't do it justice. And there are going to be massive winners along the way...
More devices connect to the Internet every day. Tech research firm Gartner expects PC sales to break the 400 million mark in 2011. Gartner also expects 55 million new tablet computers over the next year.
In 2011, global smartphone sales will hit an estimated 500 million, up more than 80% from 2010. In addition, you can expect tens of millions of new e-readers, smart TVs, and devices embedded in cars. With all those gadgets and it's easy to see how the world will add more than a billion connected devices over the next year.
Intel's CEO concluded, "Over the next five years, a billion more people will join the global online community, with 15 billion new connected devices including PCs, smartphones, tablets, embedded devices, and smart TVs."
Billions of devices means even more billions of little parts that go into each device. One big winner is the semiconductor industry.
I've written about this enormous trend in recent months. A lot of the stocks I've mentioned are up big in just a few weeks. For example, Nvidia shot up 20% in a week earlier this month. Cypress Semiconductor and STMicroelectronics are up about 20% in a little over a month. While I like these names as long-term plays, I don't expect them to go up in a straight line. As with any group of stocks, expectations can rise too fast.
For a safe way to play the big trend, you can go with the 800-pound gorilla of the industry – Intel. Intel's Atom processors are going into dozens of tablets and smartphones this year. And the company said it will boost research and development spending to $9 billion in 2011 (from $5.3 billion last year) in order to gain market share in tablet computers and smartphones.
Intel also gets more than 20% of its revenue from its server division. That's over $8 billion during 2010 – more than all but a few other semiconductor companies. This segment includes data centers. These are the massive computer systems that store and deliver the information that users are accessing and sending on a daily basis between billions of devices. When a billion people want to download the latest hit movie, there's a good chance Intel's processors are involved at some point.
But while investors are starting to flock to many of the smaller, riskier names in the semiconductor sector, they're ignoring Intel.
In fact, expectations are downright negative because of Intel's dominant position in processors for PCs, where the company controls about 80% of the market. PC sales are expected to grow just 16% this year – that's slow compared to the red-hot smartphone and tablet markets.
The stock has traded slightly lower over the past six months as many smaller, more exciting names soared 50% or more.

Wall Street analysts expect Intel to earn $2.11 per share in 2011. That's a modest 3% growth rate. Intel's actual 2011 results could easily surpass this estimate thanks to the company's server segment and its Atom processors.
Meanwhile, Intel's stock is cheap. Based on the conservative $2.11 estimate, shares are trading at less than 10 times earnings. Over the last five years, Intel's stock has traded at an average of more than 21 times earnings. Even factoring in the slower growth in the PC market, shares of Intel are a steal if you can get them around $20.
With billions of devices coming online, it's an exciting time to be a tech investor. The only question is whether you want to pay up for riskier, high-growth names. Right now, Intel looks like the better bargain.
Good investing,

Further Reading:

The five plays Larsen mentioned back in December have turned an average 9.5% profit in just seven weeks, more than doubling the S&P 500's return over the same period. "This is a huge, long-term trend that could be good for hundreds of percent gains," he wrote. "And it's just getting started." Learn more here: Tech Investors Are Ignoring the Start of a Big Bull Market.
Larsen also turned Growth Stock Wire readers on to a semiconductor play that's up nearly 9% in just 10 trading days. Get the scoop here: You Don't Have to Believe the Hype to Make Money Off It.