Transmeta (Semiconductor) (TMTA)

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Where is Transmeta standing?

I aim for a historical summary and the current state of TMTA stock in this post focused on financials. Hopefully I can kick off a thread, so be invited to add or criticize my analysis.

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1. Fundamentals:

Last closing stock price is $1.57. Is this valuation fair?

Last week we got guidance for a loss of $0.06 to $0.09 for FY06. Included in this guidance are non cash charges (patent amortization and stock option expenses of up to $0.09), without them guidance is basically for breakeven. Also important to note is guidance just goes for visible and by now basically secured revenue. It doesn't include new projects or projects with unclear future.
Anyway, let's be conservative and take -$0.08 as guidance for the year. (It's easy to divide by 4 quarters). This makes -$0.02 per quarter loss on average. In real this number might fluctuate more.

A. Let's have a look at the trailing twelve months (ttm) earnings per share (eps). It's currently negative at -0.03, so far the best in TMTA history. It gets more interesting next quarter, if we take the expected -$0.02 eps and add to it the last 3 Qs:

$0.04 + $0.05 - $0.01 - $0.02 = $0.06 ttm eps in Q1 06.

Since this is a small cap fast growth stock by now, a P/E of 50 for ttm eps is surely ok to assume:

$0.06 * 50 = $3 stock price in Q1

B. For the forward P/E of the next twelve months I advocate around 100. This is quite common on high margin growth stocks. This number is useless at the first look, since we have guidance for a loss to breakeven for 2006. However, since the guidance only included almost secured revenue of finalized projects, AND included the cost of R&D of not yet finished projects were revenue is NOT in the guidance, I suggest subtracting the R&D costs, just to see the average earning power of current projects already yielding revenue. With that I arrive at an eps of at least +$0.03 for 2006, which would equal a stock price of $3 with a P/E of 100.

We have to wait a few more months to really see this clearly.

C. Market value, would be at around $600 Mill when the stock price is $3. That would be 10 times lowest projected revenue for 2006. Quite fair if you ask me. There is also more upside should revenue improve.

We should not forget in almost any project TMTA is doing atm there is upside potential for revenue in 2006.

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2. Technicals

I prepared a weekly chart of the last 4 years. It clearly shows the trading range and the potential the stock has with all the momentum Transmeta has going for itself. I added comments of why the chart looks like the way it looks.
Can you feel the Bull? It's still a baby sucking in more and more adrenalin as the days go by.

Surely it always comes different but it would make sense to me if it works itself up to $4 in the coming weeks and months, testing the long term top of the range. Then maybe fall back to $3 around the time of the Q1 06 CC.

Here is the chart:




So IF Transmeta is running up to $4 it gets really interesting. Probably at first it will bounce, but what then? Will it be able to break out of this 4 year long trading range and get above $4 for a substantial rally into 2007? Or even into 2008?

We will see as always. So, if you trade this Bull and take profits along the way, here is my recommendation. Keep the profits at least not partially in cash, but in shares. This company has the potential to make it big.

jmo