Intel Corporation (NASDAQ:INTC) came under pressure after its recent set of results but I think the stock is well worth taking a close look at. There are some interesting underlying things happening here. In summary, Intel is making the right strategic decisions now and if you believe that global GDP will be higher in the second half and you buy Intel’s guidance, then the stock is compelling.

Intel’s Tough Year

There are two reasons why Intel had a bad year leading into these results.

The first is that guidance was progressively lowered over the year, partly because global GDP forecasts were reduced. To be fair to Intel there isn’t much it can do about that and it’s certainly not alone in having hoped for a better second half to 2012.

The second reason is that there is a structural shift towards tablets and smartphones and away from PCs. Throw in the corporate drive towards desktop virtualization and it’s no surprise that PC sales are so weak. These changes are causing significant problems for Intel’s key customers Dell Inc. (NASDAQ:DELL) and Hewlett-Packard Company (NYSE:HPQ). Naturally, both of them were hoping for a lift from the release of Microsoft Corporation (NASDAQ:MSFT)’s Windows 8. Again, it is hard to blame any of these companies for having such high hopes; after all, this has been how previous Windows cycles have gone. However, Windows 8 is not going to be as big a spur as initially hoped, and HPQ and Dell are going to have to realign their sales efforts. This is also a significant challenge for Microsoft, and pressure will be building on it to start to use its cash pile to make acquisitions. It needs more than Windows.

The combination of these factors has left Intel facing falling gross margins, rising inventories (which threaten average inventory selling prices because it needs to be reduced in a hurry) and the strategic challenge of realigning its business in order to get to the ‘processing market’ via tablets and smartphones.

Intel Responds

To its credit Intel has responded.

• Inventories were reduced by $600 million as Intel took swift action, although this helped cause gross margins to decline to 58%
• Capital Expenditures are being ramped up to $13 billion next year in order to keep technological leadership and prepare for tablet and data center growth
• Intel is becoming more active in ultrabooks, tablets and smartphones
• Gross Margins are forecast to be flat in Q2 and then get back to 60%+ in the second half
• Intel is trying to become a selective foundry manufacturer
• Data Center growth is expected to return to double digits going forward

Some commentators questioned the CapEx ramp up at a time when Intel’s sales growth is forecast to be in low single digits. Moreover it has seen costs and CapEx rise more than the top line recently. All of which is worrying, but what else can Intel do? It needs to invest in factories in order to service future growth, not least growth coming from shifting sales to new forms of computing like tablets, ultrabooks etc. This is what investors should want them to do. The real question is whether it will get it right. Will the future of computing be the kind of convertible PC/tablet that Intel would be ideally placed to service?