A coup and a foreboding on the conference call (http://www.nvidia.com/company.nsf/investor.html)
3Dfx's near worthless stock price is ample testament to NVDA's elegant financial coup. All the good pieces at a very cheap price without any of the headaches and liabilities.
Marc Cohodes of Rocker Partners provides the foreboding. Although he congratulated the company on its purchase, he had serious questions whether or not NVDA would meet its numbers. He specifically points to a company called Edom (25 % of NVDA's revenue, I think). He wondered why that company was growing faster than the rest of NVDA's segments, especially considering since it supplies to NEC and Acer, two companies Cohodes believes are doing very weak this quarter. Anyway, Cohodes' specialty is looking for companies that channel stuff, whose inventories look out of line, and whose receivables are too high. Right now the guy is flying high after Lernout & Hauspie demise. My feeling is that Cohodes probably thinks that Edom is NVDA's channel stuffer, that NVDA has been using that company as way to inflate its numbers, and that even if nothing sleazy is going on, then Edom is prime for an overdue financial setback considering the macro environment.
Below is an article from ZDnet:
3dfx on Friday announced the last stage in a slide that began more
than two years ago. The board decided to sell the guts of the
company to the current 3D king Nvidia (Nasdaq: NVDA), then take
up permanent residency in the tech company graveyard.
No one can say what 3dfx investors get out of this deal, because
the company plans to first take care of its debt, which totaled more
than $118 million at the end of October. Don't put your hopes in
getting NVDA stock -- the 1 million shares offered by Nvidia would
be considered part of 3dfx asset liquidation prior to settling with
creditors.
On the other hand, anyone who has remained a 3dfx shareholder
since last year has irrational hopes anyway. 3dfx suffered long
before the downturn in the PC market; lousy quarterly reports
have been a 3dfx staple for six of the last seven quarters.
"Long since two months-post IPO and holding on 'til they pry my
cold, dead fingers from my shares," was the self-description of
one poster on Yahoo! Finance's 3dfx message board.
You can't reason with that kind of person. Fortunately, most of us
-- including one columnist who wrote a stupidly optimistic piece on
3dfx back in May 1999 -- can look more rationally at 3dfx.
Market research analyst Jon Peddie points out that it's easy to
point fingers now -- "This is Monday morning quarterbacking, and
it's not a totally fair thing to do" -- but that doesn't mean 3dfx
doesn't deserve criticism. "They didn't have the right combination
of manufacturing and engineering in time," says Peddie, whose
firm specializes in graphics and multimedia.
Many of 3dfx's problems were self-inflicted. Not that unintentional
hara-kiri is anything new in the graphics controller industry,
which at its peak had as many as 45 companies, by Peddie's
count.
"Every company, every single one of them, that has dropped out
or failed, has been done in by its own hand," he says.
Peddie believes 3dfx was the victim of its manufacturing
ineptitude. The company jumped into the graphics card vendor
business by agreeing in 1998 to buy STB Systems, right at the time
that PC vendors began clamoring for an card that could handle
both 2D and 3D functions. Until that time, most computers had
separate cards for 2D and 3D.
But 3dfx didn't have 2D/3D chipset available immediately, so
original equipment manufacturers turned away from STB and went
with cards featuring technology from Nvidia or ATI Technologies
(Nasdaq: ATYT).
"3dfx didn't have anything that the OEMs would want," says Mike
Feibus of Mercury Research. "It's always been that you're only as
good as your last chip. 3dfx fell faster becasue they didn't have
OEM design wins to ride in the main PC market."
By the time 3dfx shipped Voodoo 3 late, Nvidia and ATI were firmly
established in the PC market. 3dfx componded its mistake by
shipping the next Voodoo generation seven months late.
Not only did 3dfx miss the holiday season entirely, but by the time
the Voodoo 5 came out, it looked overpriced for a card whose
raw performance trailed that of Nvidia's GeForce2 and ATI's
Radeon products. 3dfx tried to sell users and OEMs on the
Voodoo 5's other features -- mainly "full-screen anti-aliasing,"
which makes a 3D scene look smoother -- but reviews were
mixed at best.
"Although we strongly believe that visual quality will be the
benchmark for future success, we did not sufficiently establish
visual quality as the most important attribute for consumers to rely
on when making their purchase decision," 3dfx CEO Alex Leupp
admitted during Friday's conference call with analysts. "Therefore,
our competitiveness was impacted, which resulted in
lower-than-expected revenues, as well as pricing pressures that
were not anticipated."
Even then, 3dfx might have survived long enough to borrow
more money, had PC sales not slowed. They did, and that was
that.
Though Peddie blames 3dfx for its own downfall, Feibus argues
the real problem was improved competition. "I don't know that I
would put so much blame on 3dfx," Feibus says. "Nvidia set a
new bar."
Since coming out with its TNT chips in 1998, Nvidia has stuck to a
schedule of new technology introductions every six months.
"Over half of Nvidia's success is due to its manufacturing," Peddie
says. "You've got to have great on-time manufacturing. 3dfx never
had that. ... That's just discipline."
Shares of Nvidia are up more than 5 percent today on the latest
news. But you have to wonder if there's much to be optimistic
about.
Nvidia eliminated 3dfx as a significant competitor a long time ago,
so Nvidia's market share isn't going to get much of a boost from
this. And on a broader note, you could reasonably ask if the
market for 3D accelerators hasn't peaked, from a Wall Street point
of view.
ATI and Nvidia are branching into other fields. ATI is the leader in
3D graphics for laptops and landed the contract for Nintendo's
Dolphin game console. Nvidia is also moving into mobile graphics,
and won the accelerator spot for Microsoft's X-Box platform. That
win helped speed 3dfx's death. "3dfx bought Gigapixel, a
company with really good technology, but they bought it for the
X-Box," Feibus notes.
No one knows if 3D companies' diversification efforts -- Nvidia and
ATI are also looking at system logic and other areas -- will turn out
to be as lucrative as the PC market has been. They'd better,
because the 3D graphics business on desktop PCs isn't as rapidly
growing as it was three years ago, Feibus points out.
"The pot of gold at the end of the rainbow has declined," he says.
"I think investors know it."
Perhaps Wall Street has factored that in already. Nvidia currently
trades at 23 times estimated earnings for the next 12 months, or
comparable to Intel (Nasdaq: INTC) at a multiple of 22.
The near-term success of Nvidia and ATI will depend on how well
they can raise the price of their products, Feibus says. They've
been successful so far; the average price of the highest
performing 3D chips available have doubled over the last 18
months, according to Mercury Research. Nvidia's GeForce 2 Ultra
sells for around $400 or higher.
Peddie scoffs at any notion of a brick wall for the growth of PCs
and related fields. There's nothing wrong with a "maturing
business with reasonable margins." 22GO |
