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Jefferies Cuts PortalPlayer to Underperform

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.

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