CurrentOfferings.com Story:

Touted iPod-Flavored IPO Draws Skepticism

Dan Shirai, Corporate Financing Week, II News

As investors put in their orders for a piece of the highly sought after IPO of PortalPlayer, the Santa Clara, Calif.-based maker of chips and software for Apple's iPod and other mp3 players, industry players are wondering if the deal will have any solid support after the euphoria wears off.

"The excitement around it is emotionally based," said David Menlow, president of IPOFinancial.com, a Millburn, N.J. research firm, pointing out the company is heavily reliant on business from Apple. Though the company's revenues have spiked in tandem with the iPod's sales, it only became profitable in the third quarter of this year, when it a registered a $3.2 million gain compared to a $796,000 loss the year before.

"I think it will be a hot IPO, but it could easily spin out in a few months," said Tom Taulli, an analyst at Oceanus Value Fund and co-founder of Current Offerings, based in Newport Beach, Calif. He believes having iPod as a client is a double edged sword, because it draws a lot of positive attention, but makes it difficult to generate a profit because Apple is a tough negotiator.

The deal may also lack aftermarket support because of the fickle nature of short-term buyers. "IPO investors are momentum players and probably won't be around in six months anyway," adds Taulli.

One analyst points to JAMDAT, a September IPO which doubled in its first month and a half until its first conference call with investors last Tuesday, when projections below some analysts' hopes and a shaky Q&A; session sent the stock spiraling down 26%. "Investors took it outside and shot it," said IPOFinancial's Menlow, adding many JAMDAT shareholders lost confidence within two months of the IPO.

Still, chatter around the deal was as high as ever last week, according to Sal Morreale, an institutional salesman at Cantor Fitzgerald who tracks IPOs and speaks to numerous investors on a daily basis. An analyst in New York said investors may be looking at other 'iPod plays' such as Synaptics, which makes buttons for the popular mp3 player, up 127% this year and Apple's own shares, up 156% year to date.

PortalPlayer plans to sell 6.25 million shares at around $12.00 a share this Thursday, though some say the price could be increased ahead of the float. That's slightly larger than Synaptics' 2002 IPO, which raised $55 million by selling 5 million shares at $11. Another comparison analysts are looking at is Sigmatel, which also makes hardware for mp3 players, and went public last year selling 10 million shares at $15 each. Last week, Sigmatel was trading at a P/E ratio of 25. An IPO analyst estimates that PortaPlayers' P/E ratio could be around 23 over the next year based its performance in the last quarter.

Calls to Gary Johnson, ceo, were not returned by press time. Rick Bartlett, head of U.S. equity capital markets at Citigroup, the lead manager on the deal, and David Hermer, an equity capital markets managing director at co-manager Credit Suisse First Boston likewise did not return calls.