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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?

By Paul R. La Monica, CNN/Money senior writer

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) 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.

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.

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) and Texas

Instruments (TXN) 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.

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) 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.

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.