BUSINESSWEEK ONLINE : NOVEMBER 20, 2000 ISSUE
NEWS: ANALYSIS & COMMENTARY
Commentary: Transmeta: This IPO Darling May Be a Heartbreaker
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For an initial public offering market in deep freeze, the Nov. 7 debut of chipmaker Transmeta Corp. (TMTA) came like a balmy autumn day. It was the most highly anticipated IPO of the season--and it didn't disappoint. After nearly doubling its offering price to $21 in the days preceding liftoff, Transmeta soared another 115% on its first day of public trading, giving the startup a heady market capitalization of nearly $5.8 billion.
Transmeta flew because Chief Executive David Ditzel and crew did a masterful job of building buzz. The company's technology aims to replace many of the hardwired functions of traditional Intel Corp. (INTC/a>) microprocessors with easily reprogrammed software. And as a bonus, Transmeta's chips--introduced with great fanfare last January after five years of deep secrecy--gobble less power than alternatives, permitting longer battery life for notebook computers and other gizmos. Even IBM's surprise decision on Oct. 31 not to use Transmeta's chip in an upcoming laptop didn't derail the IPO.
SKY-HIGH VALUATION. But while Transmeta deserves credit for innovation, its prospects as an investment aren't so promising. At its current market cap, Transmeta sells for an astronomical 1,515 times its revenues over the last 12 months, or 418 times annualized revenues from its most recent quarter. That's a higher price-to-sales ratio than even Amazon.com Inc. commanded in its halcyon days, when its market cap peaked at 23.3 times sales last December. Don't even mention a price-to-earnings ratio: Transmeta isn't expected to turn a profit any time soon.
Such a high-flying valuation might be justified if Transmeta were staring at unbridled opportunity. Problem is, it has to confront Intel. The world's largest chipmaker is incomparably aggressive and has a long history of wiping out upstarts that try to horn in on its business. Cyrix Corp., for instance, made a decent run at Intel with innovative, lower-cost processors, but never gained more than 10% market share. Others, such as Rise Technology Co. and Integrated Device Technology Inc. (IDTI), have fared even worse.
Now, stimulated by the threat of Transmeta, Intel is roaring into low-powered chips. It wrested back IBM's business and promises even more abstemious chips next year. And unlike Transmeta, it can offer packaged deals of mobile and desktop processors, plus chips that support the main processors and marketing incentives such as the Intel Inside program. Such advantages make competing against Intel a tough slog--and victory can be joyless. After more than 30 years of pitched battle, rival Advanced Micro Devices Inc.'s (AMD) chips have nabbed 18% of the PC processor market. But in all that time, AMD has logged just $1.7 billion in retained earnings--less than Intel's profits in the third quarter alone.
Even without Intel to worry about, Transmeta's opportunities may be circumscribed. It has chosen to focus on the rapidly growing markets for mobile PCs and info appliances, but so far it hasn't broken into the top tier of laptop makers. And while Gateway Inc. (GTW) was expected to unveil an info appliance containing a Transmeta chip on Nov. 10, such devices aren't taking off as quickly as hoped, and many won't use Intel-compatible chips like Transmeta's. Analysts figure the company will sell about 1.2 million processors next year, for revenues of about $170 million. That means even if the stock remained flat, Transmeta still would be valued at more than 34 times revenues. By comparison, Intel--with its $34 billion in sales and 32% operating margins--now has a market cap only 10 times its revenues.
Most perplexing, however, is the spectacle of investors flocking to Transmeta on its promise to save notebook battery life. IBM (IBM) insiders say that Big Blue balked at Transmeta chips when they delivered only 20 to 45 minutes of additional battery life in notebook computer tests. And even if Transmeta can improve that down the road, microprocessors consume only 10% of the battery power in a notebook PC. Screens and storage draw far more power--and that's something Transmeta's chips don't address.
Transmeta has pioneered fine technology, and millions of people could someday benefit from its products. But as an investment, Transmeta's stock may be too hot to handle.
By Andy Reinhardt
Reinhardt covers the chip industry in Silicon Valley. |
