From RedHerring.com:
redherring.com
Is Transmeta stock a diamond in the rough?
By Stephen Lucey
Red Herring
May 8, 2001
Initial public offerings used to work like clockwork. A company would go public; 25 days later the investment bank that brought the company public would issue a positive investment recommendation on the company's shares; and insiders would dump their holdings 181 days after the offering, when the lockup expired.
Then things changed. During the IPO boom of 1999-2000, insiders weren't so quick to unload their shares at the moment of lockup expiration, since the shares' value would continue to fatten on the market's IPO feeding frenzies.
And now, IPOs have again fallen off the investment radar screen.
Apparently Transmeta (Nasdaq: TMTA) has fallen victim to this dreaded fate; the company on Monday saw its stock slide to levels not seen since its November 7, 2000, IPO as insiders became eligible to sell their shares for the first time. And while it's not clear whether Paul Allen's Vulcan Ventures still holds a 7.5 percent stake, it's clear that a lot of insiders took the opportunity to run for the exit. Shares of the once-hyped chip manufacturer fell 23.3 percent to $11.17 on volume of 32.9 million, or nearly one-third of the 109.2 million shares that became eligible for sale.
DRAMA QUEENS
Call it herd mentality, but it could be that shareholders overreacted. Granted, 109 million shares is an awful lot of stock to conduct any type of orderly release through a secondary stock offering, but insiders can't be privy to that much bad news. "There are a lot of expectations on Transmeta," says Brian Alger, an analyst with Pacific Growth Equities. "And there is a higher level of performance metric that has been assigned to the company largely because of the success of its IPO."
On its first day of trading, Transmeta peaked at a market capitalization of $6.5 billion. Now, the company is valued at $1.45 billion. And while the chip company is no longer drawing comparisons to Intel (Nasdaq: INTC), its stock may be worth taking a chance on. After Monday's sell-off, Transmeta's stock trades at 13.4 times forecasted 2001 revenue of $109 million, while shares of Intel trade at 130.8 times estimated 2001 revenue of $27.4 billion.
Part of the problem, according to Mr. Alger, is that the market doesn't grasp the story behind the company's still-nascent, low-powered Crusoe chip. But with customer wins from NEC, Fujitsu, Hitachi, Casio, and, most recently, Toshiba, Mr. Alger believes the company is executing in Japan if not in the U.S. markets. While Transmeta continues to push ahead with new designs of the Crusoe and into new markets such as low-powered servers, it has been caught in an investor backlash of softness in the customer electronics and PC market.
"They have only been selling chips since September of last year," says Mr. Alger. "To have so many customers is an enormous validation of the technology. There aren't a lot of other companies that are ever going to get that sort of acceptance, let alone have it in their first nine months."
But with visibility limited for even the most seasoned chip makers, investors have reason to be nervous in the near term. So when the lockup period for Transmeta ended and 88 percent of its outstanding shares became eligible for sale, investors decided to dump their shares before the stock fell any lower.
Despite the near-term market uncertainty, analysts remain upbeat about the company's design wins, units shipped, and market penetration. And while most analysts agree that 2001 will be a year of building for Transmeta and positive earnings are not expected until the second half of 2002, we remain positive about the long-term outlook for the company.
THE SONG REMAINS THE SAME
Although competition from Intel and Advanced Micro Devices (NYSE: AMD) remains Transmeta's biggest threat, the company continues to create new designs and new generations of its Crusoe chip. As demand for personal digital assistants (PDAs) grows, Transmeta should be a prime beneficiary.
Yet the company clearly has a long way to go to shoot down the competition. The cooler temperature and longer battery life of the Crusoe line give Transmeta's chips only marginal energy efficiency compared to comparable product offerings from Intel and AMD, says Tai Nguyen, an analyst with Robertson Stephens. Nevertheless, Mr. Nguyen remains confident that Transmeta's next generation of chips will address these concerns.
Investors need to be more patient as Transmeta grows into its core markets with new product offerings. Investors may not even be aware of the potential size of the overall space. With the stock under tremendous short-term pressure, there could be a short-term rally. One of the catalysts of that change could come from the overly bearish investor sentiment. Ahead of the lockup expiration, investors had shorted a total of 7.1 million shares, a huge amount given that only 13 million shares were outstanding at the time.
Any positive development in the Transmeta story would likely induce these short-sellers to cover their positions. If investors can remain focused on Transmeta's long-term operational prospects rather than short-term trading profits, its shares may turn out to be a bargain. |
