BOSTON ( TheStreet) -- Intel ( INTC) shattered earnings estimates last week, leaving many to expect the same from smaller chipmaker AMD ( AMD). AMD's stock, up 26% since Dec. 1, has more than quadrupled over 52 weeks. Intel has risen 61% in the past year. That suggests AMD has thumped Intel in earnings performance and chipped away at market share. That's simply not the case. A comparison of basic metrics for Intel and AMD show a stark contrast between the two. Investors should consider the following data before jumping into AMD on a hunch because its gains aren't rooted in reality. Even a phenomenal earnings release tomorrow could fall far short of lending support to the massive share-price run-up. Price-to-Earnings Ratio Intel: 12.8 AMD: N/A The semiconductor industry has an average P/E ratio of 24.9, nearly twice Intel's 12.8, suggesting the stock is cheap. AMD, on the other hand, has been posting losses. If an investment really is worth the present value of future cash flows, you have to wonder about AMD. Price-to-Earnings-to-Growth Ratio Intel: 1.19 AMD: N/A Since AMD doesn't have a P/E ratio, the PEG ratio is incalculable. As for Intel, a PEG ratio of 1.19 suggests a slightly overpriced position relative to projected growth. AMD is projected to grow 12.5% versus 11% for Intel, but the difference is negligible. Sustainable Growth Intel: 7.1% AMD: 0% Again, AMD's inability to generate a profit since 2006 has led to another no-contest victory for Intel. Sustainable growth is the product of the return on equity and retention ratio, the amount the company keeps rather than pays out in dividends. That leads, in theory, to a growth rate the company can generate off its earnings. Sustainable growth of about 7% isn't bad, but for Intel to hit the projected growth rate of 12.5% that analysts are expecting, it means the company may need to lever up its operations.
Weighted Average Cost of Capital Intel: 9.6% AMD: 10.5% Intel's modest capital structure has helped to keep its weighted cost of capital low, allowing it to avoid sizeable debt-servicing requirements and big-time equity expectations. AMD, on the other hand, has run into a situation where its liabilities have eclipsed its assets, resulting in an average cost of debt of 8.9%, nearly triple Intel's. That means AMD needs to judiciously dole out funds to projects that have a high expected return to satisfy its capital sources, making growth more difficult. Investors in AMD demand a great deal more compensation than investors in Intel due to the risk inherent in its structure. Be wary of this before investing. Will this relatively tiny company be able to produce enough of a return to compensate for the risk? Present Value of Growth Opportunities Intel: $4.36 (20.7%) AMD: $13.97 (154%) Based on AMD's current share price and its projected earnings for the coming year, we can back out how much of the stock price is based on future growth potential rather than near-term results. With over 150% of the share price coming from growth rather than actual expected profits, which don't exist, AMD appears to be pretty risky. Even if investors see AMD's chip technology as the surefire wave of the future, the current price is an unattractive investment since so much of that theoretical growth has already been priced into the shares. Clearly, the valuation for AMD is a bit optimistic, to say the least. Price-to-Free-Cash-Flow-to-Equity (Year to September 2009) Intel: 20.1 AMD: 18.1
Finally, a glimmer of hope for AMD bulls. With a relatively cheap valuation in terms of free-cash-flow-to-equity versus its goliath competitors, AMD appears to be fairly stable in terms of cash flow. Investors should also take this number with a grain of salt since two of the three quarters that drive this number show a negative reading. This erratic cash flow isn't a recent trend, either. Intel is far from sainthood in regard to free-cash-flow -- it posted a negative free-cash-flow of $1.2 billion in the first quarter of 2009 before snapping back in the following two quarters. AMD has seen a great deal of price appreciation in the past few months, and much of that increase isn't justified by fundamental support. The stock seems more like a speculative bet than something to buy as part of a value-oriented portfolio. Even if AMD surprises with its earnings release, consider passing until performance supports the valuations. If you want to play the chipmakers, look at Intel over AMD. -- Reported by David MacDougall in Boston.