Intel (INTC  ) shares were down more than 11% following the company's Q3 earnings report, showing that it beat on the bottom-line but missed on the top-line. Intel attributed the weakness to component shortages that hurt PC sales. The company also warned that its gross margins and earnings would likely take a hit over the next couple of years as it builds new chip factories and increases R&D.

Inside the Numbers

In Q3, Intel reported $1.71 in earnings per share, beating expectations of $1.11 per share. Revenue missed at $18.1 billion vs $18.24 billion. Compared to last year, this was a -0.5% drop in revenue and a 4% increase in earnings. Intell issued Q4 guidance of $18.3 billion in revenue which was in-line with expectations.

The main source of Intel's revenue miss was client computing which saw a 2% decline in sales to $9.7 billion. This is Intel's biggest unit, and the company said that PC chip sales were lower due to less overall computer and laptop sales due to component shortages which led to decreased production.

The company believes that PC demand remains strong but that it expects to deal with similar issues over the next 1 to 2 years, although it sees Q3 and Q4 as being the worst of it. Some analysts are seeing Intel's flat revenue as a sign that the surge in PC and laptop sales around the world may be over with the pandemic nearing an end. Now, there may be a period of muted demand as certainly some element of future demand was pulled forward due to these events.

Intel's Data Center Group remain its primary source for growth. Its saw revenues increase by 10% but fell slightly short of expectations. Spending in this area remains strong as companies and governments continue to increase spending on cloud computing.

Intel is spending $20 billion this year in an effort to shrink the gap between itself and rivals like AMD (AMD  ). This includes a new semiconductor factory in Arizona as the entire industry is looking to increase capacity. The company did warn that these efforts could result in pain to near-term financials.

Currently, Intel's gross margin is at 56%, but the company said it shouldn't drop below 50% and should also start gradually creeping higher after 2 years. Intel's plan to use its newest facility in Arizona to manufacturer other companies' chips would also lead to higher margins.

Intel believes that the semiconductor industry will double in size over the next decade. If this is correct, then Intel's project could be a massive success especially as it's receiving government subsidies on the project.

Stock Price Outlook

Intel has been a value trap with its low valuation being enticing but ultimately hiding that its business may be in decline. This is especially true as the company is around 1.5 generations behind AMD in terms of chip speed. Thus, Intel is losing pricing power and market share.

However, the company finally seems serious about tackling this effort and is taking its medicine. If an investor believes in Intel that a surge in R&D could shrink the gap and that its foundry will be successful, then this gap down could be a great, entry point.