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Sales of server chips were up 170% in the second quarter of 2010 from the second quarter of 2009, Intel (INTC) announced last night (July 13) when the company reported earnings.

When I last updated this stock back in April after the company announced first quarter earnings and an increase in gross margins to 63.4%  I wrote “The company had been projecting gross margins of 58% to 64%. The increase in gross margins is the key piece of news in this report. To get margins up to that level the product mix at Intel has had to shift toward a higher proportion of sales from more profitable server chips. Industry watchers have recently forecast a two-year cycle of big increases in server purchases as corporate customers upgrade their equipment. Intel seems to be signaling that it’s going to ride that trend to higher margins for more than just the next quarter.”

Exactly, Intel said in reporting second quarter numbers. Gross margins climbed to 67%. That drove earnings to 51 cents a share on revenue of $10.8 billion. Wall Street had been expecting just 43 cents a share on revenue of $10.25 billion.

And Intel has no intention of letting up on competitors. The company said it will invest an additional $400 million to accelerate the transition to its next generation of processors.

Lots of other parts of Intel’s business did well this quarter. Sales of its Atom chips processors for netbooks, a segment that had raised concern in the first quarter, climbed 16%, for example.

But the long-term story is that Intel with its server chips is successfully riding the transition from a PC-based world to one that puts more and more of global computing power on the Internet.

I’m going to raise my target of $30.40 by December 2010 very modestly to $31. I think that will still leave Intel undervalued for the long run, but I’m just not sure what multiples this very nervous stock market is willing to award even to a great long-term story such as this one.