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iPod mania!
Apple isn't the only stock that's zoomed because of the iPod. But are iPod suppliers good buys?
February 15, 2005: 12:08 PM EST
By Paul R. La Monica, CNN/Money senior writer

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The runaway success of Apple's iPod has created strong business for several other tech companies.
The runaway success of Apple's iPod has created strong business for several other tech companies.
Synaptics has soared on iPod momentum but shares have slipped lately due to concerns that it may lose Apple business.
Synaptics has soared on iPod momentum but shares have slipped lately due to concerns that it may lose Apple business.
Shares of SigmaTel have surged since the introduction of the iPod Shuffle while PortalPlayer has slumped.
Shares of SigmaTel have surged since the introduction of the iPod Shuffle while PortalPlayer has slumped.
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NEW YORK (CNN/Money) You own an iPod and you love it. You also like to follow the Peter Lynch mantra of investing in what you know. So naturally, you'd think that Apple would be a good stock to buy.

But Apple (Research) is not the only company cashing in on the iPod's success.

Audible (Research), which reports earnings on Tuesday, has developed technology that allows consumers to download audio versions of books and other media on digital players like the iPod -- its stock has surged 145 percent in the past year.

Synaptics (Research), which makes the click wheel for the iPod, has gained 36 percent in the past 12 months.

SigmaTel (Research), a manufacturer of chips that most industry sources believe are being used in Apple's new flash-memory iPod Shuffle device, has shot up 68 percent.

And SigmaTel competitor PortalPlayer (Research), whose processors are the guts behind the iPod and iPod mini, is up about 15 percent since its IPO in November.

So are any of these stocks still worth buying now? These stocks are not for the faint of heart but there still appears to be some upside for a couple of the suppliers.

Spinning wheel

Investors in Synaptics have been on a wild ride lately. Shares are down 24 percent this year due to concerns Apple may develop its own click-wheel interface.

But the sell-off may be overdone, said Michael Shulman, director of research with independent research firm ChangeWave Research. He said he's heard from sources in the consumer electronics industry that Synaptics was not at risk of losing all of its Apple-related business.

"People have overreacted. The iPod is strong and we see no reason for investors to run away from one of Apple's key suppliers," he said, adding that Synaptics also sells its touch pad technology to other manufacturers of computers and consumer electronics devices such as Dell, Hewlett-Packard, Samsung and Sharp.

And as a result of Synaptics' plunge, the stock now trades at just 21 times fiscal 2005 earnings estimates, a reasonable valuation considering that analysts expect earnings to grow at a 28 percent clip annually, on average, for the next five years.

Do the shuffle

Taking a look at the two chip companies, SigmaTel is probably the better bet.

SigmaTel, trading at 24 times 2005 earnings estimates, is a bit more expensive than PortalPlayer, which has a P/E of 20. But SigmaTel is probably worth a premium.

Quinn Bolton, analyst with Needham & Co., thinks that there's a good chance that SigmaTel could wind up beating earnings and revenue estimates in the next few quarters on the strength of the iPod Shuffle. "The company clearly has benefited from the launch -- there is lots of enthusiasm around that device," Bolton said.

SigmaTel also has a more diverse customer list than PortalPlayer, which generated more than 90 percent of its revenues in the first nine months of last year from sales of chips to Inventec, a Taiwanese contract manufacturer that makes the iPod for Apple.

So the fact that PortalPlayer's chips are not being used in the iPod Shuffle is a major negative for the company. Investors want to see the company win more contracts to lessen its dependence on Apple so it's no wonder that PortalPlayer's stock is down more than 20 percent year-to-date.

Don't call an audible

Audible's momentum is undeniable. Analysts expect the company to report a revenue increase of 81 percent from a year ago. And for the next five years, analysts are projecting a phenomenal earnings growth rate of 47 percent annually.

Audible has also signed some interesting deals, including one with the National Football League that allowed football fans to download radio broadcasts of the Super Bowl to their iPods.

But the company is tiny, with expected sales of just $54 million this year. And of all the ancillary iPod plays, Audible is by far the most expensive stock. Shares trade at about 70 times 2005 earnings estimates.

So investors should be cautious with any of the company's riding the iPod momentum train. Synaptics is a clear example of the volatility investors can expect. That's why Ori Shachar, an assistant portfolio manager with Driehaus Capital Management, said that the only foolproof way to play the continued momentum of the iPod is through Apple.

"As a whole, that group of iPod suppliers has seen a lot of big gains. Apple still looks good but there is a lot of downside risk with those other names," said Shachar. Driehaus owns Apple but none of the other stocks.

ChangeWave's Shulman owns shares of Apple but his firm has no banking ties with any of the companies mentioned. Needham's Bolton does not own shares of companies mentioned but his firm has done investment banking for SigmaTel and PortalPlayer.


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