Transmeta Soars in Its First Day of Trading Despite Sector Woes

SAN FRANCISCO —  Investors shrugged off lingering doubts about the fortunes of the chip industry Tuesday and rallied to the initial public stock offering of Transmeta Corp., a closely watched microprocessor company that saw its stock price more than double in its first day of trading.

The company’s shares rose as high as $50.88 in early trading Tuesday before closing at $45.25--up $24.25 from its IPO price of $21.

The strong showing represents one of the most successful tech IPOs this year. Transmeta, which competes with Intel in the portable-computing and information-appliance markets, raised $273 million Monday after underwriters had upped the initial price to $21 from $11-$13 last week due to strong investor demand.

At the market close Tuesday, the company enjoyed a $5.8-billion valuation--approaching the market cap of Advanced Micro Devices, a well-established competitor.

Investor optimism seemed impervious even to untimely bad news. Last week IBM reversed an earlier decision to use Transmeta processors, which require less battery power than conventional chips, in some notebook computers.

“Transmeta offers a significant development in chip technology,” said David Menlow, president of IPO Financial Network, who had previously called the company a potential “Intel killer.” Other analysts have heralded Transmeta’s chips as a major breakthrough.

Transmeta burst onto the scene in January after operating in “stealth” mode--keeping its development plans secret--from its founding in 1995. The company builds a family of chips dubbed “Crusoe” after the fictional shipwreck victim and adventurer.

The processors use “code morphing”--a technique that simplifies the software demands of standard Microsoft Windows-based software applications. The chips use less power, cost less than competing products and sacrifice little in performance, the company says.

The technology world greeted the company with a feverish buzz, partly because of the credibility of founder and Chief Executive David Ditzel, a leading chip designer who was previously a top engineer at Sun Microsystems. Linus Torvalds, creator of the insurgent Linux operating system--a competitor to Windows software thought to be poised for success in the market for both PCs and information appliances--is a key engineer for Transmeta.

The firm also was boosted by its list of influential investors, including Microsoft co-founder Paul Allen and global financier George Soros.

Big computer makers--including IBM, Hitachi, Fujitsu, NEC and Sony--quickly jumped on the bandwagon, showing prototype notebook PCs based on Crusoe chips at a trade show last summer. The apparently rapid adoption suggested that the company was gaining immediate traction in a marketplace dominated by Intel.

But only Sony and NEC have shipped Crusoe-based products. Fujitsu announced that it will release similar products this month.

According to Ashok Kumar, an analyst with U.S. Bancorp Piper Jaffray, Compaq and Toshiba--two other notebook giants--have joined IBM in decisions to drop Crusoe from current product plans.

“The hype is being deflated to a great degree,” Kumar said.

Experts said the defection of some large computer makers suggests investors’ high expectations may prove difficult for the company to meet. Transmeta lost $71.5 million in the first nine months of this year, though it only began selling its chips in the summer. In its IPO filing to the Securities and Exchange Commission, the company noted that “[We] expect to incur further significant losses, and do not expect to achieve profitability in the near future. . . . We may never achieve profitability.”

“They’ve been implying things that I don’t think they can deliver on,” said Linley Gwennap, an analyst with The Linley Group, referring to suggestions that Crusoe chips can double a notebook PC’s battery life.

“The back light on the display is the single largest power consumer in most notebook PCs,” he said. “Even if you cut the processor power consumption to zero, that won’t necessarily double your battery life.”

Meanwhile, Intel has moved quickly to curb the power appetite of its own chips, rapidly approaching the efficiency of Transmeta’s offerings.

“Intel [probably] pitched IBM, and said, ‘We’ve developed a lot of new products recently that do pretty much what Crusoe does,’ ” Gwennap said. “If your leading vendor gives you everything you want, why would you buy a chip from a start-up?”

The performance claims for the Crusoe chips have also stimulated controversy. Testing by a number of independent trade publications suggests that they operate far more slowly than competing chips, although industry experts say the testing was improperly designed and therefore useless.

Transmeta has not released detailed testing data that could be cross-checked by independent sources.

Some analysts suggest that Transmeta may fare better in the nascent market for Internet appliances, such as wireless Web pads, despite stiff competition from Intel, National Semiconductor and others. PC maker Gateway announced in May that it would use the Crusoe for just such a product, under development jointly with America Online.

In light of such opportunities, IPO Financial Network’s Menlow called investor enthusiasm warranted.

“You have IBM electing to not use the chip in one of its notebooks lines--it doesn’t mean that they are completely turning their back on it,” he said.