Jefferies downgraded PortalPlayer (PLAY) to underperform from buy, citing news about the company's loss of business.
The semiconductor, firmware and software services company said Thursday that its PP5021 System-on-Chip (SoC), which is expected to be available in the second half of 2006, has not been selected by Apple Computer, Inc. for use in their mid-range and high-end flash based iPods.
Analyst Adam Benjamin says news of design loss spells disaster for the company that counted on Apple for 90% to 95% of its sales. He believes investors had known about the risk but hadn't really anticipated it. He thinks the problem is exacerbated because of a bigger surprise: the "nano" product loss. He says 60% to 70% of the chips sold to Apple from PortalPlayer are for "nano." He notes that investors will probably discount the shares on Thursday, letting the stock price fall to a slight premium to $7 cash value. He cut his stock price target to $10 (10 times his new 2006 EPS estimate of $1.07, down from $1.81) from $36. He also cuts his 2006 revenue estimate to $233.8 million from $328.6 million.