Earth to investors: Hype doesn't pay
November 13, 2000 12:00 AM PT
I come not to disparage Transmeta (TMTA), only to mock it.
I'm worried about the implications of the great Transmeta IPO. Upping the price twice before it came
out the gate, then immediately doubling and staying there! On the one hand, it was reminiscent of the
good old days of 1999. On the other, it was reminiscent of the bad old days of 1999.
On Friday, we saw the fickle stock buyers begin to back off the stock. And the pundits are now
wondering: Why did everyone ignore the warning signs going into the IPO, and why are they suddenly
paying attention now? The simple answer is that hype, not fundamentals, is still driving the market for
technology stocks. Everyone bought because the hype was too great to ignore. And now reality seems to
be setting in. People have probably started boasting to their tech-savvy friends about buying Transmeta,
and after seeing the look on their friends' faces, are rushing back to their computers to sell.
Let's face it. Transmeta is a really interesting company, and I wish it all the success in the world, but it
does not deserve a valuation of more than $5 billion! Not at this point. The main thing this IPO proves is
that we have not learned a thing from the bubble blast of 2000.
It's not Transmeta's fault. It's primarily the press that feeds off the hype machine, and this one was
irresistible. We had David Ditzel, former Bell Labs genius, former Sun Microsystems (SUNW) genius,
now Transmeta CEO genius. Linus Torvalds, the genius who created the overhyped but impressive
Linux operating system, now Transmeta's "code morphing" software genius. The promise of taking on
Intel (INTC) with terrific technology. Investments from George Soros, Paul Allen, America Online
(AOL), Compaq (CPQ) (which has since backed off on using Transmeta's chips), Gateway (GTW),
Sony (SNE). This is a killer story!
Unfortunately, Transmeta has enjoyed much too long of a honeymoon with the press. Sure, it's a
fascinating story, but let's show a little skepticism here.
Not a slam-dunk
I don't usually focus on individual companies in my columns anymore. But I can point to many reasons
why this story is not a slam-dunk success. The company has set itself up for a fall, and its stock price is
likely to suffer badly as a result.
First, Transmeta has unfortunately chosen to take on a losing battle -- displacing Intel's monopoly of
portable computer microprocessors. That will never happen. Read my lips: No new microprocessors. Not
in a market already dominated by Intel, a company with $1.9 billion in profits last quarter!
Advanced Micro Devices (AMD) has tried to compete for years with Intel-compatible chips. It is
doing fairly well now, but that's a cyclical success. AMD releases a fast new processor that leapfrogs
Intel's speedy chips, and sales pick up. Intel releases a new generation processor and AMD looks like a
frog that got hit by a truck until it can create a new chip that is compatible with Intel's latest version. It's
getting better at the game, after 15 years or so of practice, but it's a rough game.
I know what you're saying: Just because Intel is big, it's not invincible. Remember when IBM was the
immovable force in computers? Yes, I do. But Intel and Microsoft (MSFT) and Compaq and others did
not succeed by taking on the markets in which IBM already dominated. They outcompeted in a brand
new market: personal computers. Displacing an existing monopoly is virtually impossible.
Transmeta is also focusing on the handheld device market, which is where it should be. But the hype has
swirled around the much larger (today) portable computer market, its relationship with several PC
makers and the code-morphing software that makes it compatible with Intel. And no one paid much
attention to the fact that, just before the IPO, IBM backed off its promises to use the chip. And others
will do so at any hint that Transmeta-based portables cannot compete.
Why give up speed?
And it can't. What does it offer? Not more speed, like AMD, but lower power consumption. Early
indications are that the software morphing causes a performance hit. Ignoring the fact that things like
monitors and disk drives suck up considerable power themselves, is this really a good enough feature to
displace Intel? Tell the truth. If your choice is between speed or longer battery life, which way will you
go? How about just buying a spare battery?
My prediction is that once people realize that this company cannot make a significant dent in the portable
computer market, the stock price will look like that of an online pet store. Transmeta will then shift its
focus to the emerging markets and insist that was its intent all along. That won't help the stock much,
though.
We were supposed to have learned that betting on hype is a losing proposition. There are actually some
really promising dotcoms out there, but they were caught up in the Internet hype whirlwind and saw their
stock prices soar to unprecedented heights. When the wind died down, the stocks of the good companies
fell along with all the other dotcommies.
I fear that we are doomed to repeat history. A second-generation Internet with great promise. A second
generation of dotcom companies with great hype. Or, perhaps, a new generation of biotech and Internet
infrastructure companies and wireless devices, all offering too much hope until a shakeout shows that
there were too many of them. A second bubble.
Still, I'm able to look on the bright side. It'll make a great story.
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