Analysts See Liberate Stock Jumping

By Hal Plotkin
Silicon Valley Correspondent

Analysts say Liberate Technologies Inc.’s {LBRT} stock should get a nice boost from a big cable-TV trade show next month that could put it on track to post gains of 300 percent or more over the next 12 months.

“It just takes a shift in investor psychology and this stock takes off again,” says Gene Munster, an analyst at U.S. Bancorp Piper Jaffray, based in Menlo Park, Calif. “The trade show could very well be the catalyst.”

San Carlos, Calif.-based Liberate makes software used in set-top boxes for Internet-based interactive-television applications, which are sometimes called netTVs. Analysts say the company’s recent progress signing up major accounts will be highlighted at the upcoming National Cable Television Association annual conference and trade show scheduled for the week of May 8 in New Orleans.

Liberate’s stock has fared poorly, for the most part, over the past few months, after topping out at more than 120 a share in December.

Liberate Technologies Post-IPO Stock-Performance Chart

Analysts who follow the stock, however, say the poor performance stemmed from the recent wholesale change in overall market sentiment regarding Internet stocks in general, rather than any change in the company’s underlying fundamentals, which they maintain are stronger than ever.

Last week, Dain Rauscher Wessels analyst Jennifer Smith upgraded the stock to “strong buy-speculative” from “buy-speculative,” setting a 12-month price target of 130.

“We believe Liberate continues to lead in design wins for the set-top box market,” Smith wrote in the research report, noting that the company, which is burning through about $15 million a quarter, has an ample bankroll of about $420 million in cash and marketable securities on hand.

Smith says she decided to upgrade the stock in recognition of the company’s recent progress and in anticipation of more positive announcements coming out of the upcoming cable-TV trade show.

“One big announcement we expect is the possibility of a deployment [of Liberate’s technology] by AOL,” Smith says. “That would add a lot.” AOL has about 20 million paid subscribers, she notes.

“Liberate is way ahead of the game,” agrees Prabhas Panigrahi, senior vice president at New York-based Dresdner Kleinwort Benson, which is part of London-based Dresdner Bank Group.

Panigrahi says Liberate’s recent announcement of several major design wins creates a barrier for entry for other major competitors, such as Microsoft Corp. {MSFT} and Mountain View, Calif.-based OpenTV Corp. {OPTV}, both of which target the same market.

“Switching costs are actually quite high,” Panigrahi says. “If you work with Liberate for six months or a year to get the bugs out, it’s difficult and costly to switch to someone else.”

Liberate’s recent design wins, which represent the first step in the deployment of the firm’s Internet infrastructure product, include Cox Communications {COX}, satellite-TV firm StarTV, and Time Warner Inc./America Online Inc. {TWX}/{AOL}, among others.

“The StarTV alliance may be the most significant,” Panigrahi says. “It represents potentially 300 million homes in Asia alone.” Panigrahi currently has an “add” rating on the stock, equivalent to a “buy,” along with a 12-month price target of $90.

Most of Liberate’s current revenue, about 70 percent, comes from the sale of design and consulting services. In the future, however, the company expects to generate the bulk of its revenue from fees paid based on the number of individual users connected to each of its customer’s broadcasting networks.

Van Baker, vice president for consumer platform research at the Gartner Group, based in San Jose, Calif., says Liberate’s progress with major customers in the design approval stage is significant.

“The design wins establish that there is an alternative to Microsoft and some of the other guys out there,” Baker says. “It’s kind of like the landscape is being set before the battle starts.”

Like other analysts, Baker says Microsoft doesn’t have to fail for Liberate to succeed.

“There is absolutely room for multiple players in this market,” Baker says, while quickly adding that many cable-system operators appear reluctant to do business with Microsoft.

“There’s almost a predisposition among [multiple system operators] against Microsoft,” Baker adds. “They don’t want to see the same thing happen to them that happened with PC operating systems. That’s working in Liberate’s favor. But there’s plenty of room for both of them and even some others.”

Liberate has so far scored 29 design wins with major customers, about three times more than its closest competitor, Microsoft, according to Dresdner Kleinwort Benson.

The overall market for netTVs is expected to grow at a compound annual rate of 73 percent between 1997 and 2002, according to International Data Corp., based in Framingham, Mass. IDC notes that 98 percent of all U.S. households have a television and 34 percent have two or more.

“This is going to be an epic market,” says Munster of U.S. Bancorp Piper Jaffray. “Absolutely everyone who watches TV will be impacted by this.”

Munster says Liberate is undoubtedly not the right stock for investors who need to see current earnings, since profitability is still at least two or three years away. But he says it is the right stock for investors who have the patience to hold on and wait for the gains he thinks are almost certain.

“If you want to make a bet on interactive TV, the stock is a great value,” Munster says. The Piper Jaffray analyst has the highest 12-month price target, — at 150 — among analysts who follow the stock.

Oracle Corp.’s {ORCL} founder, chairman and chief executive officer Lawrence J. Ellison created and Oracle still owns 47 percent of the firm, which was originally called Network Computer Inc. Other Liberate investors include America Online, Comcast {CMCSK} and Lucent Technologies Inc.{LU}.

Smith says that investors who buy the stock should keep an eye on the company’s Web site from time to time to make sure deployments are taking place over the next 12 to 24 months, as anticipated.

“This year and next year is when we’re going to see a lot of deployments,” Smith says. “That’s what we’ll be looking at.”

On March 21, Liberate posted a loss of $12.1 million on revenue of $7.5 million for the fiscal third quarter ended Feb. 29, as compared with a loss of $6.1 million on revenue of $4.5 million for the same quarter last year.

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