In a sign of strong demand for its initial public offering, Transmeta Corp. (Nasdaq: TMTA) priced 13 million shares at $21, $3 above its range of $16 to $18. Shares trade Tuesday.
The company's software-based Crusoe chip has gotten plenty of hype; Transmeta says it can make semiconductors that run cool and conserve energy without sacrificing performance. Transmeta is viewed as a potential challenger to Intel (Nasdaq: INTC) and Advanced Micro Devices (NYSE: AMD) in the notebook market.
The enthusiasm surrounding Transmeta enabled the company to bump up its price range from $11 to $13 despite a shaky IPO market. Morgan Stanley is the lead underwriter. Deutsche Banc Alex Brown and Salomon Smith Barney are co-managers.
Even though Wall Street is enamoured with Transmeta, the clouds are swirling.
Last week, IBM cancelled a project aimed at building a ThinkPad mini-notebook using Transmeta's Crusoe processor.
And on Tuesday, USB Piper Jaffray analyst Ashok Kumar asked in an Intel (Nasdaq: INTC) research note whether Transmeta was "Winnie the Pooh or Barbarian at the Gate?" Kumar's thesis was clear -- Transmeta's advantage over Intel has deteriorated. Kumar said Transmeta has been "designed out" by IBM and Compaq (NYSE: CPQ) as Intel focuses on low powered chips.
"It is time to take another look at the highly touted startup. When the company announced its unique "code-morphing" technology last January, it appeared to have an impressive advantage over Intel's products in reducing power, a key factor in extending battery life. But this advantage may be short-lived," said Kumar in a research note.
As Intel fights back and focuses on the mobile market, Transmeta will be relegated to fighting for the "nascent Webpad market." Transmeta will could have better success in the Webpad market, an area Intel will probably ignore. The Webpad market, however, is a long-term deal. Prices are currently too high for Webpads to become a big consumer hit.
Kumar said Transmeta's technology "has been over-hyped," and the young chip maker could end up with "an 'Intel Inside' tread on its back."
Big backers, big losses
The promise of a low-power chip has enabled Transmeta to round up some big-time backers.
The young chip maker counts America Online (NYSE: AOL) and Compaq among its financial backers. to Sony Electronics (NYSE: SNE), Hitachi and Fujitsu are also backers.
As Kumar points out, however, Transmeta's backers are also the company's sole customers. As of Sept. 30, Transmeta has shipped products in volume only to Sony and Fujitsu Ltd. Sony will use the Crusoe chip in its VAIO PictureBook C1VN notebook computer, and Fujitsu will use the chip in two of its notebook computers. Hitachi is signed on to use Crusoe in three notebook computers and an Internet appliance. Meanwhile, Gateway (NYSE: GTW) will use Crusoe for Internet appliances still under development with AOL.
And then there's the losses.
For the six months ended June 30, Transmeta reported sales of $358,000 and a net loss of $43.7 million. It also has an accumulated deficit of nearly $120 million. For the quarter ending Sept. 30, Transmeta said its revenue would be about $3.5 million. The company has a limited operating history, having only shipped its Crusoe chip in bulk this past September.
In regulatory filings, Transmeta wasn't shy about the risks it faces.
Transmeta faces stiff competition from Intel and AMD in the notebook market. Transmeta also faces MIPS (Nasdaq: MIPS), ARM Holdings (Nasdaq: ARMHY) and National Semiconductor (NYSE: NSM) in the Internet appliance market.
Transmeta also noted that "substantial resources" will be devoted to educating potential customers. If the company can't convince manufacturers to use Crusoe -- and potentially redesign products for Crusoe -- Transmeta could be harmed.
Kumar is skeptical. In the notebook market, any buzz Transmeta had is disappearing because Intel hopped on the low-power bandwagon. Although Intel lacks Transmeta's code-morphing technology, it may not matter since Intel is so entrenched with PC vendors.
"Now that Intel has stopped ignoring the needs of the growing mobile market, Transmeta will find it more difficult to sustain an advantage," said Kumar.
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