Investors Give Transmeta Pact Two Thumbs Up, but They've Only Seen the Trailer
By Caroline Humer
Senior Writer
3/26/01 4:34 PM ET
Chip designer Transmeta (TMTA:Nasdaq) on Monday proved that befriending the right people counts as much on Wall Street as in Hollywood.
Transmeta, which designed a low-powered microprocessor, made a splash last year with its successful initial public offering. Since then, however, investor enthusiasm for it and other semiconductor stocks has been pushed down by the decline in personal computer demand.
But Monday Transmeta got a temporary reprieve from the doom and gloom macroeconomic story after it announced that it had moved into the good graces of software powerhouse Microsoft (MSFT:Nasdaq) . Microsoft will use Transmeta chips to test and develop its Tablet PC, a new-age cross between a personal digital assistant and a notebook that Microsoft began promoting last November for its ability to read handwriting.
Microsoft's decision is important because it means that Transmeta has broken a link in what many considered to be the ironclad bond between Microsoft and microprocessor giant Intel (INTC:Nasdaq) .
But Transmeta's reprieve may be overstated, because investors are betting heavily on potential and in the process pushing up the company's already lofty valuation.
"The important thing here for Transmeta, and the reason the stock is reacting, is the endorsement. There's this certain perception of a Wintel marriage," said Brian Alger, an analyst for San Francisco investment bank Pacific Growth Equities. (His firm hasn't done any underwriting for Transmeta. He rates the stock a buy.)
For years, most personal computers were shipped with a de facto standard of a Windows operating system and software and Intel chips -- hence Wintel. That has begun to change recently, as Intel competitor Advanced Micro Devices (AMD:NYSE) has won contracts in both the retail and corporate computing markets. And now Transmeta is making inroads.
Transmeta's deal with Microsoft also addresses criticism that it was unable to move from working with midlevel players into the realm of the "big boys," Alger said. For instance, Fujitsu and Sony (SNE:NYSE ADR) sell notebooks with Transmeta chips, but not U.S. giant Dell (DELL:Nasdaq) -- which uses only Intel chips. Alger expects more deals with well-known names later this year.
Transmeta investors were certainly glad to hear of its deal with Microsoft. With help from the fact that a relative small amount of the company's shares trade, the stock gained $2.81 Monday, or almost 18%, to $18.81. Monday's increase comes after the stock had sizable gains last Thursday and Friday, though it's still far from its all-time high of $45.61 shortly after it went public.
But in truth, the stock may be getting ahead of itself.
Down the road its newly public ties to Microsoft could be worth quite a lot to the nascent company, which booked only $16 million in revenue in 2000. But the Tablet PC isn't due to come to market until next year, and when it does, it's unclear how big of a market it'll actually find. For instance, Pacific Growth's Alger says he isn't planning on changing his earnings estimates to reflect the possibility of Tablet PCs being shipped with Transmeta chips in them.
According to Thomson Financial/First Call, Transmeta is expected to post a loss of 26 cents a share this year on revenue of $159 million. It's expected to earn 13 cents a share in 2002 on revenue of $346 million. With its stock near $19, Transmeta's price-to-earnings ratio for 2002 is at about 146. Intel, meanwhile, has a P/E based on 2002 earnings of 29.
In addition, while the risk of Transmeta being left out of the digital revolution is less likely with this announcement, it's not to say that the chip designer and Microsoft are huddled in the corner alone drawing up plans for this project. Its agreement with Microsoft is nonexclusive, and competitors are also talking to the software company. Intel, for its part, is working with Microsoft on low-power chips and Tablet PC development, according to an Intel spokesman.
So while Transmeta may have worked its way into the company, it's good to remember that cool crowds are often fickle. |
