Many recent IPOs have performed extremely well since their debuts -- but not NOR flash memory maker Spansion (NASDAQ:SPSN). The spinoff of Advanced Micro Devices (NYSE:AMD) and Japanese chip maker Fujitsu continues to struggle with business and technical woes.
According to Dealogic, 24 IPOs have raised $3.9 billion so far this year, a 20% increase on the $3.2 billion that 16 companies raised in a similar period in 2005. In contrast, Spansion went public in mid-December at a price of $12. Since its debut, it has traded as low as $11.71 and currently sits at $13.35 a share.
Part of the problem: The stock market hasn't been favorably disposed to tech IPOs since the tech bubble burst six years ago. Only 31 Internet companies have gone public since 2000. If not for Google's (NASDAQ:GOOG) absurd valuations, the group (as measured by the USA Today Internet 50 index) would have lost more than 8% last year, compared with a 1.4% gain for the Nasdaq as a whole. When you look at the market's reception to recent IPOs like Chipotle Mexican Grill, which doubled on its first day of trading, an entrance like Spansion's is all the more underwhelming.
Another problem is that Spansion is still churning out losses. It lost $47.5 million last quarter, close to double the $26.6 million it lost in the year-ago period. As the largest exclusive producer of NOR memory, Spansion commanded a 25% market share as of August 2005. Compare that with Intel (NASDAQ:INTC), which commands a 28% market share in NOR memory. Spansion and its industry have been beset with a number of problems, including an inventory glut, declining prices, and looming technological issues.
Flash memory -- both NOR and its competitor NAND -- is used to store information in cell phones, digital cameras, and PDAs, among other mobile devices. Unlike the DRAM memory used by computers, which loses its data once you turn it off, flash memory stores the data on the chip. Flash chips are getting ever smaller and more densely packed; the 90-nanometer size has become the industry standard, and manufacturers like Intel and Samsung are moving toward 65 nanometers now, with 45 nanometers expected by the second half of 2007.
Such small sizes pose problems for NOR flash memory makers. Flash chips store memory using electricity, and their "on-off" switches are wrapped in a thin silicon layer to prevent the electrons from escaping. Shrinking their size much further will create gaps in the silicon that will allow those electrons to leak out, losing or corrupting the data. NAND flash, which companies like SanDisk (NASDAQ:SNDK) have focused on, also suffers from shrinkage barriers, but it is able to scale more effectively and more cheaply than NOR. Spansion seems to have focused its efforts entirely on a market that may soon meet its limitations.
The company says it expects to reach profitability by the second half of 2006 by relying on chip sales to high-end mobile phone companies. It's also developing new products like its second-generation MirrorBit technology and its ORNAND chip, which it says will combine the best elements from NOR and NAND.
One worrisome development that investors should take note of: The company announced after the market closed last Friday that its chief financial officer had resigned, using the well-worn excuse that he wanted to "pursue other opportunities."
While spinoffs can often be lucrative investments, Spansion may not follow suit. When a member of your executive management leaves in a flash, it's hardly an endorsement for a company's future business prospects.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
