The Investment Column: Imagination Technologies

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The Independent Online
IMAGINATION TECHNOLOGIES, formerly Videologic, has always had the scarcity value of being a tech stock on its side. But the stratospheric rise in its share price since September has followed the appearance in the shops of Sega's Dreamcast games console, which includes Imagination's PowerVR graphics chip. Imagination receives royalties of around $2 per chip. Strong Dreamcast sales have helped the company turn last year's half-year loss into a modest pre-tax profit.

Still, there's no danger of Imagination being valued on mere fundamentals. On analysts' full-year forecasts of pounds 3.9m pre-tax profits and 2.5p earnings per share, the shares trade on a forward p/e of 78. There's much to support the rating, however.

The success of PowerVR has been built on games consoles. The big prize is domination of the fragmented market for graphics chips inside personal computers. Imagination is licensing its technology to STMicroelectronics, which sold five million PC graphics chips in the past 18 months. For the time being, STMicroelectronics lacks the partnerships with the big PC manufacturers required to make PowerVR a real money-spinner in this respect.

Still, Sega's Dreamcast is likely to have a three-year lifespan, and Sega is funding development of the next generation of PowerVR chips.

Next autumn, Imagination should complete development of PowerVR for digital television set-top boxes. This is also licensed to STMicroelectronics, whose chips appear in more than half of all set-top boxes produced.

The possibility that Imagination will tie-up with Symbian, the mobile- phone manufacturers' joint venture, to use PowerVR in handheld devices, and the likelihood that STMicroelectronics will unveil a deal with a PC manufacturer will support the shares at these levels and investors should not be tempted to sell.