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MIPS shares enjoy stellar week

MIPS Technologies' shares rise 17 percent today, capping a week in which the stock surged 75 percent amid favorable comments from Wall Street analysts.

Shares of MIPS Technologies rose 17 percent today, capping a week in which the stock surged 75 percent amid favorable comments from Wall Street analysts.

Shares of Mountain View, Calif.-based MIPS gained $4.69 today at $32.25 on volume of 2.5 million shares, more than twice the stock's average daily volume.

Three Wall Street firms sang the stock's praises this week, noting that the company is taking action to generate more revenue from certain business segments as other segments dry up. They also said the stock is undervalued relative to similar companies.

The company develops technology that enables a microprocessor to communicate with its environment, and also designs processor chip systems. MIPS receives royalty and licensing fees from companies that use its technology, which include makers of set-top boxes, handheld devices, printers, and home video games system like Nintendo 64 and Sony PlayStation.

On Wednesday, Chase H&Q analyst Eric Chen reinitiated coverage of the company with a "strong buy" and a price target of $46.50.

The next day, Credit Suisse First Boston analyst Erach Desai reiterated his "strong buy" rating and set a price target of $65.

Today, Dain Rauscher Wessels analyst Jennifer Smith upgraded the stock from "neutral" to "strong buy" and set a $50 price target.

In his note, Chen wrote that the stock will be more liquid in the future because SGI will spin off its 65 percent stake in the company to SGI shareholders on June 20.

The 25 million class "B" shares that will be distributed to shareholders are slightly different from the class "A" shares that currently trade. Class "B" holders can elect 80 percent of MIPS Technologies' board of directors.

"The merged shares should improve the float and therefore the (stock's) liquidity, which would allow large shareholders to take a position," said Chase H&Q research associate Scott Williamson, who works with Chen.

The more shares that are available, the more attractive the stock is to large institutional investors who trade in blocks of thousands of shares.

The company's stock also has fallen considerably from its March high of $111.62, putting its price-to-earnings ratio at a more attractive level. The overall P/E of the tech-heavy Nasdaq index is about 148, compared with MIPS' P/E of 48.

Among the risks facing the stock, Nintendo will phase out MIPS' technology in its popular game consoles. Currently, MIPS receives the bulk of its revenue from Nintendo.

Dain Rauscher's Smith said in her report that "Nintendo revenue will drop from 53 percent of revenues in 1999 to 45 percent of revenues in 2000 to 21 percent of revenues in 2001."

However, Sony will use MIPS' technology in its PlayStation 2, which should offset some of the lost revenues, but not all.

The company intends to grow other parts of its business to compensate for the loss.

Chen estimates that MIPS' non-Nintendo business will generate $87.5 million in revenue during calendar year 2001, which is a three-year growth rate of 35 percent.

"MIPS, in our view, is a clear market share leader, holding the No. 2 position in the embedded microprocessor field...a field that we believe will enjoy at least 50 percent growth over the next several years," wrote Dain Rauscher's Smith.

Chase H&Q's Williamson agrees. MIPS technology "is the de facto standard of how chips communicate with each other," he said. This popularity makes it difficult for competitors. "There are design teams and tools built around (MIPS' technology), which we believe is a significant barrier to (marketplace) entry."