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Intel Prepares for Break Out

Intel may have finally found its groove, and its shares are finally beginning to reflect it. As the company prepares to release its third quarter earnings Tuesday afternoon, investors have to ask themselves whether now is the time to jump in, or whether this will be another winter of discontent.

Analysts anticipate Intel will earn 27 cents a share on just over $9 billion. Remember that Intel increased its outlook to $8.8 billion to $9.2 billion, up from the original $8.1 billion to $8.9 billion. It would be a marked, sequential improvement, but year over year, Intel still has a ways to go when the company reported 35 cents on $10.2 billion. That said, the signs of a recovery are there, and Intel seems positioned well to take advantage of the key trends driving the chip industry right now, most notably the advent of netbooks, the coming PC upgrade cycle courtesy of next week's Windows 7 release from Microsoft , the ongoing surge in Mac sales from Apple , and a replenishing of the channel as PC makers took inventories down to almost imperceptible levels.

Look, I'm not suggesting that there will be a rip-roaring jump in PC demand, but there are some strong signs that consumers are spending on new computers, and enterprise customers are beginning to upgrade. Worldwide chip sales did indeed fall 16 percent in August year over year, but they were up for the sixth straight month, according to the SIA.

All this bodes well for weary Intel investors who always seem to play bridesmaid when it comes to big market rallies.

Intel shares have certainly not been a slouch, up 38 percent year to date, but for a stock that fell 44 percent last year, it also hasn't taken advantage of the broader market rocketship ride, and might be due for some kind of break out. Yet, when it comes to "break out," Intel suffers from its own theory of relativity where a big move might be a few percentage points, and not the 10 or 15 percent growth companies like Apple and Google might see. Also, remember that Intel is sitting on an $11 billion mountain of cash, and with all the M&A activity going on, and the successful integration already of Wind River Systems, I suspect Intel will be on the hunt again in the not-to-distant future. I thought maybe nVidia would make sense, but with a new feud between the two afoot, maybe not so much anymore?

Still, now might be a good time to get in and roll the dice on a good upgrade cycle to come. CEO Paul Otellini inherited a company at a truly difficult time in Intel's history. It appears his strategy to cut back, push low-cost but strong margin microprocessors, and the company's push back into communications and wireless is serving Intel well. I spoke with Otellini at the company's Developer Forum last month in San Francisco, and he was candid about Intel's entry into smart phones. It represents enormous opportunity for Intel and the company simply has to be there. I'm just a little surprised that it took the company this long to recognize it. (I guess "once bitten" when it comes to Intel's ill-fated partnership with Research in Motion and the Blackberry all those many years ago.)

Intel also continues to slog its way through the mud with rival Advanced Micro Devices (which reports Thursday) and the big anti-trust case with the European Union. AMD has made some compelling points recently, and Intel tells me it wants to answer those allegations but can't because of an EU-imposed gag order, which AMD disputes, by the way.

Nonetheless, the Intel story Tuesday night will come down to margin strength, and whether it's expanding, and what kind of guidance Intel offers. Short of something surprisingly significant, and bad, such as a hiccup in Intel's recovery or signs that a recovery may be slowing or somehow in reversal, this may indeed be a good time to give Intel a second look.

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