Mar. 31, 2003. 08:33 AM
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YVONNE BERG/CP FILE
Kwok Yuen Ho, CEO and chair of Markham-based ATI Technologies Inc., peers through an assembly-line magnifier. Youth hunger for video games is a force behind the company's not-bad fortunes.
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Games help ATI outperform PC sector
Company supplies graphic chips for games, computers; Analysts bullish despite brushes with regulators
M. COREY GOLDMAN
SPECIAL TO THE STAR INVESTING
Montreal—The PC industry isn't sitting pretty. Despite markdowns and incentives and improved hardware that offers more storage space, speed and bang for the buck, consumers and businesses appear content to make due with what they have.
But take a stroll past any adolescent playing a video game on their computer and you will see evidence an area of the PC sector that has continued to thrive in the midst of the tech and consumer downturn: graphics chips, or as those in the industry playfully call them, the right side of the computer's brain.
Demand for these chips, which retail from as low as $99 to as high as $499, has remained consistent. PC manufacturers install them in computers that consumers order. Consumers go into retail outlets and upgrade their machines with them. And manufacturers of cell phones, personal digital assistants and other gadgets are using them to make graphics look groovier.
In the centre of it all is ATI Technologies. The Markham-based firm has been making all kinds of graphics chips and components for desktop and portable computers for a long time. Despite the depressed market for PCs and other technological gadgets, its sales have been on the rise, giving it the thumbs-up from analysts who see the stock as a long-term play.
"(ATI) is not necessarily tied to the growth or lack thereof in the PC market," said Brian Alger, a technology analyst with Pacific Crest Securities in San Francisco "It gains its revenues through the consumer market and a variety of other diversified channels that have allowed the company to perform pretty well in a fairly mediocre environment."
Unless you are an aficionado of the inner guts of computers, you probably wouldn't recognize any of ATI's products by name. The product line is a jumble of monikers, such as `Radeon 9800 Pro,' `Rage Fury Maxx' and `All in Wonder' — names that, to the average consumer, equate to the parts installed in your refrigerator. They do something but you don't know much about them.
"Historically people have always thought of graphics chips as a PC thing, and our products have not been as visual on a consumer level because of it," said Rick Bergman, senior vice-president of marketing at ATI. "But we're now in a leadership position in the PC area and we are working very hard on expanding our consumer focus to include different products that use specialty graphics."
That broadened focus, analysts say, helps explain in part why ATI has seen its stock rise 47 per cent since the start of the year and 39 per cent in the past month alone, despite the lacklustre PC market and the downtrodden economy. The graphics chip maker earlier this month reported a losing second quarter, though its results beat forecasts, spurring investors to push the company's stock up a whopping 22 per cent in one day.
Shares of ATI closed at $7.92 on the Toronto Stock Exchange Friday, down 12 cents.
ATI and its arch-rival, California-based nVidia, split the games console market. ATI has the lock on Nintendo's GameCube; it designs the graphics chip that goes into the box, which Nintendo then has Taiwan Semiconductor Manufacturing produce and insert into the console. ATI gets a royalty fee each time a chip is produced for a GameCube.
nVidia, meanwhile, designs the chips that go into Microsoft's Xbox. Those chips are produced by the same Taiwanese company, and nVidia collects its own stack of royalty checks from the software giant.
Sony's Playstation2 game console uses its own graphics chip designed in house.
ATI and nVidia have other things in common. Their chief executives have each had their own respective run-ins with securities regulators over insider trading. That's when someone is accused of being privy to information that no one else has access to, and traded their stock to unfair advantage.
Earlier this year, the Ontario Securities Commission accused ATI CEO Kwok Yuen Ho, his wife Betty and four others of illegal insider trading in advance of a profit warning in May, 2000, which sent the company's stock price on a downward spiral.
In a strikingly similar case, nVidia president and CEO Jen-Hsun Huang and 10 of his employees were accused by the U.S. Securities and Exchange Commission of insider trading in nVidia stock in March 2000. The U.S. Attorney's Office separately charged four of their employees with criminal insider-trading violations.
Despite the brushes with regulators and despite the uncertain market environment, analysts that cover ATI feel the company has a lot of upside potential. Several upgraded their price targets and over-all recommendations on the stock after the company released quarterly numbers a few weeks ago.
Still, they caution that risks remain. There is growing uncertainty as to whether consumer demand will continue to drive sales. And there is uncertainty as to whether the insider trading allegations against K.Y. Ho and others will result in a positive outcome for the company.
"One has to assume there will be a psychological effect on the stock at a minimum," said Alger.
And ATI and nVidia are looking at some new and rather large competition from the grandfather of chip makers. Intel's new Centrino chip for notebook computers already has an integrated graphics chip in it, meaning PCs with it don't necessarily need ATI or nVidia products.
"While ATI is coming into a strong product cycle and should continue to see design win momentum, two risk factors remain: the likely significant share gains of Intel's chipset for Centrino notebooks with integrated graphics and the resolution of litigation and regulatory investigations," said Andrew Root, a technology analyst with Goldman Sachs in New York.
At around $8 (Canadian) a share, which is still a long way from an all-time high in the $37 range, is ATI stock a buy?
"We like what we see and we're optimistic about the company over the long term," said analyst Alger. "I think the best way to gauge how things will go for ATI and for the graphics chip market in general is too keep an eye on the backlog of games sales. It's the kids that will ultimately dictate how the market will perform."
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