Due North: The battle for faster graphics:
by Bob Beaty
September 14, 2000
If you want to get a fair indication of which company is currently leading the graphics acceleration market (chips and boards that make games, DVDs and all manner of graphics run as smoothly as possible on computers), overlay a one-year chart of ATI Technologies (ATYT) and competitor NVidia (NVDA). While the latter's share price is now in the US$70 range, a seven-fold increase since September 1999, ATI shares are currently trading about US$2 less than their year-ago level of US$11.50. It's apparent which company investors favored.
There's no question that NVidia has supplanted ATI as flavor of the past few quarters. Its March announcement that it will supply the graphics processors for Microsoft (MSFT) gaming console the X-Box boosted the stock, and the company now has a market cap of north of US$4.5 billion. ATI's market cap, meanwhile, languishes at about half that, at around US$2 billion.
Revenue growth key to stock boom
Revenue growth has also propelled NVidia's stock price. It announced revenues for the first half of fiscal 2001 of US$318 million, up 114 percent from the first half of fiscal 2000. Earnings for the first half of fiscal 2001 were US$0.52 cents per share compared with US$0.18 cents for the same period of 2000.
The First Call earnings per share consensus for 2001 is US$1.15 and US$1.52 for 2002. That means the company has a price-to-earnings multiple -- based on the current share price of US$72 vs. projected 2001 earnings -- of 63.
ATI revenues for fiscal 2000, on the other hand, are estimated at US$1.4 billion, up a mere 14 percent from fiscal 1999. Projected earnings per share for 2001, according to First Call, are US$0.41 cents. Using those figures, ATI has a projected price-to-earnings multiple of 20 times, much lower than NVidia's 63.
Microsoft deal overvalued
One analyst I spoke with, who asked not to be named, believes the run-up in NVidia's share price is unsustainable. He believes the Microsoft deal has been given too much weight. If Microsoft produces 2 million X-Boxes with the NVidia graphics processor, he says, the deal could certainly generate substantial revenue for NVidia, approximately US$100 million. However, NVidia's presumed success in the venture hinges on the X-Box's success, which is yet to be proven.
ATI is obviously at a crossroads. The challenge for management now is to convince investors that the company can perform in a market that is about to hit a so-called "memory bottleneck." This means that the success of new graphics products in the future will depend more on who has the better architecture, rather than what company can simply produce a faster graphics accelerator.
Ray Sharma of Credit Suisse First Boston in Toronto has set a 2001 revenue target for ATI of US$1.7 billion and predicts earnings for the same year will hit US$0.45 per share. Analyst John Safrance of First Associates in Toronto has had a "sell" recommendation on ATI for the past half year. He may change that rating over the next couple of months, after ATI's latest sales numbers come in and he determines whether the company can achieve profitability in 2001. For fiscal 2001, he holds a revenue target of US$1.5 billion and projected earnings of US$0.45 per share for the company.
Problems over for ATI?
ATI's fourth-quarter 2000 numbers will be out Oct. 12. The company announced in May that its fourth quarter results would only be slightly ahead of the third quarter. Nevertheless, it appears that ATI's myriad problems -- such as a worldwide component shortage and heavy discounting by competitors -- are behind it, according to President and COO Dave Orton. He looks forward to a profitable 2001 and a return of the business to ATI's core competencies.
Orton told UpsideToday that there was room in the graphics accelerator market for at least two strong players, and, much like the Intel (INTC)-AMD (AMD) relationship, customers were more comfortable when there was healthy competition among suppliers.
Mercury Research of Arizona stated that ATI commanded 49 percent of the graphics accelerators supplied to the notebook computer market -- a sector that is growing by nearly 25 percent a year, outstripping the 15 percent annual growth of the desktop market.
ATI intends to use its proprietary Radeon technology to move more into the high-end computer market and allow its products to cascade down the food chain to the low-end PC market. One of ATI's problems over the past year was that it simply wasn't effective in capturing a significant piece of the high-end PC market. An initiative to introduce its Rage 128 Pro chip into that market in the first two quarters of fiscal 2000 also faltered.
Looking ahead into huge market
ATI sees in the next 12 months a chance to return to profitability and re-assert its world leadership position. ATI expects to release details of several deals with news customers over the next few months, and Orton said ATI planned to get into the handheld appliance market by late 2001 to early 2002.
The graphics accelerator market is huge. According to Mercury Research, there will be 130 million PCs produced in 2000 and 150 million in 2001. That represents a high sales potential for graphics accelerators, which have become standard on most PCs. Settop boxes are also becoming more common and, while ATI's settop marketshare is currently under 10 percent, the company intends to double that penetration by the end of calendar 2002. Further, it intends to increase its share of the high-end PC market from 25 percent to at least 40 percent.
ATI Chief Executive Officer K.Y. Ho stated several years ago that the company would surpass US$1 billion in revenue within five years. It took four. The company now says it will cross US$5 billion in revenues within the next five years.
The question is, can ATI execute its game plan and win back investors and analysts? In a sector where technology changes quarter by quarter, it won't take long to find out.
Let the chips fall where they may.
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