Transmeta: Going the Low Power Route

by Chris Connor

A Hyped Technology Makes for a Hyped IPO

The story of tiny chipmaker Transmeta {TMTA} taking on semiconductor behemoth Intel {INTC} has been billed as a modern day version of David versus Goliath.  TMTA was pitted against the mighty INTC because of Transmeta's supposedly revolutionary technology that allows its chips to consume significantly less power - a huge benefit to devices like laptop computers.  Additionally, investors were also attracted by the fact that Linus Torvalds, the creator of Linux (the arch rival to the windows operating system), was Transmeta's lead software engineer.  Combined these two factors propelled the company's IPO to an incredible first-day gain of 115.48 percent last fall.  This performance was impressive because it occurred in weak IPO market conditions (the IPO market has yet to recover from the carnage in the equity markets).  

Cutting through the hype, Transmeta's Crusoe chip does consume significantly less power than rival chips because the Crusoe is powered primarily by software (which means less transistors) instead of silicon.  This power savings, however, apparently comes at sacrifice of speed - both the INTC's Pentium and Advanced Micro Devices' {AMD} Athlon are significantly faster.  There has been speculation within the industry that if the Crusoe tried to match the speed of the Pentium and the Athlon, it would not consume less power than those two chips.  Simply put, Transmeta's technology is not a revolution but a trade-off of speed for less power consumption.  When Transmeta's chips can match the speed of Intel's and AMD's chips and still consume significantly less power, Transmeta will then have revolutionary technology.  Until then, it is still interesting to see how the company is progressing during its infancy. 

Product Revenues Starting to Stream In 

Although Transmeta was strictly a research and development company prior to June 30,2000, the company did generate significant revenues through license agreements with IBM {IBM} and Toshiba.  In 1998 and 1999, TMTA generated license revenues of $28 million and $5 million respectively.  The company lessened its overwhelming dependence on license revenue last September when Sony {SNE} included a Transmeta chip in its Vaio Picturebook, making the laptop the first commercial product to market to feature the Crusoe.  Now, all of TMTA's revenues are generated from the sales of actual products.  

During the last three quarters, the company has rung up product sales of $3.46 million, $12.36 million, and $18.57 million respectively.  Look for product revenues to continue to soar as Casio, Sony, and NEC are set to unveil new Transmeta-powered notebook computers.  Looking further out, analysts project that the company will grow its earnings 50 percent a year for the next five years. 

Looking Forward

Currently, Transmeta is strictly a show-me type stock that needs to elbow it way into a niche it can become a solid market leader in. That strong niche for Transmeta could be in the server market.  Server makers are already investigating ways to put hundreds of Crusoe chips in servers to conserve electricity.  If using multiple Crusoe chips does save significantly on electricity, TMTA should be able to make a nice niche for itself in that market because of the power shortages going on today in California and elsewhere.  Furthermore, Transmeta's Linux connection recently came to the forefront as the company released a version of Linux called Midori that is focused solely on handheld devices.  This version of Linux is intended to mesh more with TMTA's power-saving capabilities.