PortalPlayer ( PLAY) is out to prove that it's more than just an iPod chipmaker. PortalPlayer is touting new technology -- to debut later this year -- that involves a small LCD screen placed on the outside of notebook computers that allows users to get stock quotes, check sports scores and look up phone numbers without opening and booting their machines. PortalPlayer touts the technology, which it calls Preface, as huge for the company and the PC industry. Even though the first computers with Preface won't be released until near the end of this year, PortalPlayer believes it will get 10% of its revenue this year from the chips. And the company is predicting that by 2008 50% of all notebooks sold will include the new SideShow (as it's called by Microsoft) screens. "This could be for us a significant push into a new market with a new customer base," said PortalPlayer CFO Svend-Olav Carlsen at an investor conference earlier this month. Diversifying revenue and customers could prove important. About 95% of the company's sales in the fourth quarter were to contract manufacturers that make Apple's ( AAPL) iPods. The risk inherent in that dependence on Apple seems to have weighed heavily on the stock: Although PortalPlayer's earnings more than tripled and its sales more than doubled last year, its stock trades at a discount to less successful specialty chipmakers such as Synaptics ( SYNA) and Sigmatel ( SGTL). And although some analysts question whether the market for Preface will grow as quickly as PortalPlayer officials predict, it may not matter for the stock. Because the company's revenue base is relatively small -- and the PC market so huge -- the company's sales could be significantly affected even if the technology only makes its way into niche markets.
"New things happening in the PC industry can mean great things for small chip companies," says one analyst at a San Francisco-based hedge fund who asked not to be named. Even if PortalPlayer eventually gets just 20% of its revenue from the Preface sales, "it would be gigantic for the company, because it would lessen the risk for investors," says the analyst, who follows the company but whose firm does not hold PortalPlayer shares. One of the knocks against the traditional PC has been the length of time it takes to boot up. Indeed, some analysts see a threat emerging to PC sales from devices such as smartphones that offer quicker access to data in a smaller package. The Preface technology is in part a response to that threat, allowing users to tap into data stored on their PCs -- such as song files or recent email messages -- nearly instantly, without having to start up the full-blown Windows operating system. Microsoft chairman Bill Gates touted the technology at the Consumer Electronics Show in Las Vegas last month, because it's expected to be one of the key features of Vista, the company's forthcoming update to its Windows operating system. Microsoft plans to launch Vista late this year. However, the new technology would add an expense. The wholesale cost of the Preface-related hardware alone is about $75, estimates Richard Shim, an analyst with market research firm IDC. That could mean an extra $150 to $200 at retail prices, he notes. With many laptops selling for $1,000 or less, that's a significant cost and will likely limit the potential market for the Preface technology in the near term. "It's a pretty big hurdle," Shim says. Another problem is a lack of a clear "killer application" -- no program designed for it that would jump-start consumer demand. PDAs already provide instant access to appointment and address book entries. Apple has sold 42 million iPods to people who want instant, portable access to their music. And Research In Motion ( RIMM) has carved out a nice business by selling instant, portable access to email.
"Not everybody is going to want to pony up the extra dough for something like
Preface, says Roger Kay, founder of technology consulting firm Endpoint Technologies. "They're going to want to see the utility of it demonstrated." In addition, the technology currently doesn't include a way to input new data, notes Rob Enderle, a principal analyst with the Enderle Group, a technology consulting company. At least as it has been sketched out so far, users won't be able to type a new email message using their Preface screens or update an address book entry, he says. "They will figure that out in generation two of the device," says Enderle. But he says that the second generation could be two or more years away. Still, even something less than a blockbuster could mean big things for PortalPlayer. The company posted sales of $225 million last year, and analysts are expecting it to show $350 million in sales this year. Assuming that analysts have built the Preface-related sales into their estimates, that means that they expect nearly 30% of PortalPlayer's sales growth to come from Preface. Continued growth along those lines will be important to diversifying beyond the iPod, and that could do wonders for the stock. PortalPlayer is currently trading at less than 14 times its expected earnings this year, while Sigmatel, which produces the chips behind many of Apple's would-be digital music rivals, is trading at a multiple of nearly 48 times expected earnings. "They're passengers on the Good Ship iPod," says the hedge fund analyst. "To be able to have a story about anything besides iPod will be good to tell Wall Street."