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Meet the iPod's Intel
PortalPlayer, which makes chips used in the iPod, has filed to go public. Could it be a hit?
August 11, 2004: 12:31 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - It isn't a major surprise that the recent initial public offering filing of semiconductor company PortalPlayer got lost in the shuffle.

A chip company IPO? In this market? If Google is having trouble stirring up people's passions for tech then why should anyone pay attention to some small semiconductor firm?

But PortalPlayer, which filed for its IPO on Aug. 4, bears watching over the next few months. Here's why.

PortalPlayer gets most of its business from a Taiwanese company called Inventec. And Inventec is the company that makes this little device that you may have heard -- it's called the iPod.

Now do I have your attention?

PortalPlayer's processors are the brains and guts of Apple Computer's uber-popular music player. So in a sense, PortalPlayer is like the Intel of the iPod.

What's more, the company's newest chip, the PP5020, is the first to feature photo-processing capabilities, in addition to audio. That could enable PortalPlayer to expand from the digital music device market into other hot areas of consumer electronics such as camera phones.

The PP5020 chips could possibly be used in some sort of camera or video version of the iPod as well, which has been the subject of a fair amount of speculation in tech circles. Apple (AAPL: Research, Estimates) was unavailable for comment about these rumors.

Risky, but worth watching

Of course, PortalPlayer, once it starts trading (probably in the fall), has a long list of risks.

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For one thing, the company is tiny. PortalPlayer reported revenues of just $21 million in 2003. However, sales are ramping up quickly, and through the first six months of 2004, it already has topped last year's total.

The company is not profitable either, certainly a red flag for skittish tech investors. The company lost $8 million last year and another $3.3 million in the first half of 2004. But it is worth noting that losses have narrowed during the past few years. PortalPlayer lost $25.3 million in 2001 and $22.5 million in 2002.

iPod Immunity: Apple's stock has held up well during the summer's tech wreck.  
iPod Immunity: Apple's stock has held up well during the summer's tech wreck.

Also it's not as if PortalPlayer is assured of market dominance just because of its relationship with Apple. PortalPlayer lists chip giants Intel (INTC: Research, Estimates) and Texas Instruments (TXN: Research, Estimates) as competitors. Still, it's unlikely either of these firms will be a major threat in the near future.

"PortalPlayer has done a beautiful job with the iPod," said Shyam Nagrani, a consumer electronics analyst with semiconductor research firm iSuppli. "It would be difficult for Apple to move the iPod design to another chipset. PortalPlayer is extremely well positioned."

Finally, market conditions would also need to change in order for PortalPlayer to have any chance of a favorable reception. The Philadelphia Semiconductor index has fallen nearly 20 percent since the beginning of July.

Overreaction? PortalPlayer rival SigmaTel has plunged along with other chip companies lately...despite strong 2Q results.  
Overreaction? PortalPlayer rival SigmaTel has plunged along with other chip companies lately...despite strong 2Q results.

Shares of one of PortalPlayer's key competitors, SigmaTel, have been hit extremely hard lately. SigmaTel makes chips used in MP3 players made by Rio, Legend Computer, Samsung and Creative, which store music using flash memory, not a hard drive like the iPod.

SigmaTel has plunged nearly 50 percent during the tech sector's swoon.

Despite the weak market overall, the market for digital media is undeniably hot and barring a consumer spending meltdown, it should stay that way.

Consider this. When SigmaTel (SGTL: Research, Estimates) went public last September, it did receive a warm welcome from investors. The stock was up nearly 50 percent from its first day's close (and 94 percent from its offering price) through the end of June.

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By Paul R. La Monica

So it's only been since the entire sector started to free fall that SigmaTel has slumped. And there does not appear to be anything wrong with the company or with demand for MP3 players.

Last month, SigmaTel reported that revenues were up 86 percent from a year ago and that earnings per share came in a penny per better than analysts' estimates. In addition, the company said it expects sales for the third quarter to be up between 22 percent and 41 percent from the same period last year.

With that in mind, and assuming that tech stocks start to stabilize in the near future, companies like SigmaTel and PortalPlayer should benefit immensely as consumers start scooping up iPods and other digital music players during the holiday shopping season.

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