PortalPlayer Inc., Analysis of Stock
The valuation of PortalPlayer Inc. (NASDAQ: PLAY) and its future prospects make PortalPlayer quite attractive at current prices (~$11). You can find quite a thorough analysis of the company’s valuation here so I will not run through it again save to highlight some key aspects that attracted me to this stock (based on 2006 Q2 balance sheet):
* Net cash of $194MM or about $7.50 per share. Their current assets and Intellectual property are valued at $75-125MM bringing share price in the $10.50-12.50 range
* PortalPlayer’s sockets are in use in Sandisk Sansa e200 (currently has ~10% market share) and iPod video players. It has also announced that it has won a wireless socket deal.
* PortalPlayer’s Preface technology for Microsoft Windows Sideshow device will be a part of Vista due to ship in January 2007. PortalPlayer announced “collaborations with Acer, ASUSTeK, Compal and Quanta, two of the largest notebook OEMs and two of the largest notebook ODMs in Taiwan”.
* The CEO Gary Johnson will be leaving to pursue other startup opportunities, however, his profile reveals that he has not stuck with any company more than 2-3 years in his recent career. In fact it might be a good thing as PortalPlayer forays into richer portables someone with a sales background for example could bring new vigor and reach to the company.
* Earnings Yield of 45% and return on capital greater than 100% (see Magic Formula Investing screen)
* PortalPlayer’s low-power and WiFi enabled chipsets along with audio/video/image support makes these chips very lucrative for new and existing portable media devices. They already have a proven track record with Nanos and iPod videos and have also worked with Creative and Samsung among others.
* PortalPlayer is partnered with Microsoft to develop Preface technology for Windows Sideshow for Vista. Preface will aim to extend notebook use to a full day on one charge while allowing users to use the auxillary Personal Media Display (PMD) to access data and content on the notebook including email, calendars, music, video and photos. Further, Sideshow devices can be wireless and don’t have to be physically embedded within the notebooks. Sideshow devices will also feature Gadgets which will be a part of Windows Vista Sidebar and are already a part of Windows Live.
Other interesting pieces of the puzzle and possible technological convergences that you could see sooner than you think:
* Microsoft’s Zune player has wireless capabilities, however, in my previous post on Microsoft Zune I noted that WiFi use-case scenarios are very limited (6th bullet). WiFi capabilities are under-utilized at the moment but it’s imminent that they will open up to support more interesting use-case scenarios. It would be an awful waste of hardware space, battery life and production and materials costs to enable WiFi for just photo sharing.
* As an aside, convergence and interoperability of WiFi devices can also be seen in home and media. Apple’s latest foray into iTV which will feature 802.11n to support high quality video streaming from your PC along with picture slideshows, music, apps and possibly even games on your television. Windows Media Center which has been around for much longer also supports the same scenarios.
* Windows Vista has powerful P2P networking support. This will mean good things for Zune and other WiFi enabled devices that will be able to interoperate with Vista and PortalPlayer’s chips offer an easy platform to build these devices.
* I believe Zune has the capability to act as a sideshow device even in its current form based on Microsoft’s Sideshow specifications. It is possible that PortalPlayer might get a socket in Zune along the line though this is highly speculative.
* Even if Zune has nothing to do with it, SideShow devices interfacing with Vista computers open up the playing field for 3rd party hardware plugins similar to the ones that exist for the iPod today, only these will be for the PC. For example a cheap SideShow device could interface with your PC and run the Weather gadget or display recipes and be mounted in your kitchen–essentially acting as dumb terminals. If Microsoft does manage to create a rich ecosystem here, PortalPlayer’s outlook could become very promising. Again, this is highly speculative though I don’t doubt it much but then again I have a technological bias. Also these scenarios would not be enabled for another year or so.
These bullets highlight PortalPlayer’s cheaper valuation which give it little downside but at the same time there is huge upside due to the technological potential. PortalPlayer chip designs have also been through quite a few iterations providing a stable platform for Portable Media Devices.
Another interesting find: PortalPlayer’s Indian design and development center currently has a number of positions listed for WinCE engineers, WiFi and other curious positions posted in the last month or two.
Disclaimer: I work for Microsoft but have no internal visibility into any of this; all information here was garnered from public resources and is highly speculative. I currently own PortalPlayer (PLAY) stock (for pretty much the same reasons I mention here).
What about cash burn? PLAY will be using its cash reserves to further fund R&D since operating cash flow has dried up with the loss of the Apple contract. How long do you think the company can sustain itself on $200M cash?
Also, Gary Johnson (outgoing CEO) liquidated 30,000 share from mid-August to mid-September. If actions speak louder than words, that doesn’t say much about his confidence in PLAY’s prospects!
They will be burning cash but that’s not necessarily a bad thing. You want to put your cash to work–that’s the whole point of having cash so long as it has good yeilds. With their kind of earnings yield and RoC they’re in a good position here. This is a growth company whose resources are underutilized. If PLAY can secure some more contracts they will become attractive again and I am bullish here. The demand for their chipsets will go up with time driven primarily by Vista Sideshow and potentially other companies wanting a platform to build their own portable media devices.
Gary Johnson’s sales are not so significant as they’re automatic sells. The rest in the company are holding off.
Great analysis and great response. I’ve been looking at PLAY for the past month and the cash number is a major question mark for me. If it can be reinvested at existing returns, then we’ve got some mispriced gold here. But this assumption, in the near-term, depends on MS Vista and Zune. But, if PLAY’s MS avenues don’t pan out, the cash might last them another 2-3 years only.
Funny enough, you had it right on. PortalPlayer and Microsoft were about sign a contract in October, when the Board called it off. It would have increased the price of stock too much, and Apple needed to ensure that Nvidia bought up PortalPlayer so that Samsung could continue providing the IPod Design at a cheaper rate. There had been a breach of contract against Samsung, possibly apple. Samsung had a non-compete/non-disclosure for PortalPlayers customers. Nvidia was able to benefit, PortalPlayer assets made the financials of Nvidia look much better.. good enough to begin filing SEC reports.
Gene:
Thanks for the insight… it had always seemed to me that NVidia snagged up Portal Player for a real bargain–some would say even unfair prices. I also feel Portal Player board members could have done a lot more with the company given the looming next gen mobile platforms (iPhone, Android, LG etc) at the time.