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Technology Stocks : S3 (A LONGER TERM PERSPECTIVE) -- Ignore unavailable to you. Want to Upgrade?

To: Ken Muller who wrote (9110)	1/29/1998 4:41:00 PM
From: Michael	Respond to of 14577

Keep in mind that nVidia is a private company held by larger corporations. They very wellmay not be willing to sell out. Also, the companies that hold nVidia have resources so I don't think they need to look to an outside company for money. Maybe distribution, Fab, marketing, etc., but not money.

To: Ken Muller who wrote (9110)	1/30/1998 2:16:00 PM
From: Bill Lin	Read Replies (1) \| Respond to of 14577

Ken, Walt had said that S3 will be cash neutral or slightly negative in FY '98. using a basis cost of $100mm for the USC investment, i am guessing a basis of $33mm for the 1/3 sold. (this basis may be high, since total cost may only be $82mm...too lazy to verify). So that makes $39mm as "profit" (which is taxable). at a 35% tax rate, you get a "net" of $25.35mm, or $58mm "free cash". $40mm was used to purchase the crus portfolio. so they will "lose" about 18mm this year, (?? plus whatever minority interest they get from USC (about $27mm)??). The minority interest from USC is non cash, so i doubt this additional loss. however a writeoff of old inventory will take care of this "profit". They have loan covenants, so they will have to dip into their new credit line. As for Intel, i'm sure they bought rights to use the patents. I am not sure whether S3 bought exclusive use of the patents. From the CC, it sounded like they did for the 40 patents, and not for the cross license portion. If they can use it against ATI and others, i'm sure they will (to alleviate the cost of patent purchase). The patents probably have to do with 2D and "free"3D, so AMD and Cyrix /NSM may not feel the need to buy the patents. If there is significant 3D patents inside (as far as I know, Lockheed has the most significant 3D patent portfolio), then 3DFX is the most vulnerable. If anyone can get the patent numbers, i'll read them and disseminate the info. CRUS is out of graphics, as far as i know, so your investment in this company must be based upon their "proprietary" technology. Not having looked at this company in depth, i can't give you an informed opinion. My guess from a quick glance is that it is now "fairly" valued and should trade slightly behind the SOX index. Some noise is being made of AMD or NSM buying S3 for the patent portfolio. 1) why didn't they just buy it from CRUS? why pay $500mm for a $40mm portfolio? 2) what competitive advantage will AMD get for S3? ATI would be a better purchase. In canadien dollars, its 30% off. (sorry, SKI :) S3 is alone on its road, as far as i know. The best road is a purchase of nVidia. However personalities enter this road. The liklihood of this purchase is low (in my current opinion), because personnel in nVidia may be lured by the fame and richness of being a "hot" company in Silicon Valley; A cache they will not have in being bought by S3 (they will only be filthy rich, which is not the same). The strategy the TH must pursue is an intellectual acquisition strategy. He must get the best and brightest and most flexible people. GJ's strategy of "branding" S3 was 4-5 years premature. Intel didn't start branding until they got about $700mm profit per year. Then they could really afford the consumer branding. S3 didn't have enough cusion (only $150mm), to withstand an industry downturn (in revenues, not units). TH must get the "leap frog" strategy to drive down $/performance by 1/2 every year for the next 5 years. he must remain a design bureau. The investment in FDJA is only a temporary gain. If you follow small Silicon Valley stocks, you know the mentality of failure. They capture a large market share of a small market by being first innovators. But then they don't innovate fast enough, and die after 3 years. Innovation in HDTV and line doubling will proceed in a logarithmic rate later in 1999/2000 as HDTV broadcasts become more widespread in larger US metropolitan areas. This means Silicon Integration of that FDJA box into a 5 chip set, 3 chip set, then 1 chip set. This integration cycle may take only 18 months to occur. The driving factor will be consumer price points. How much will YOU pay for an HDTV set? $2000? US per capita income is about $24k, so i think its more like $500. (see Walmart) Obviously i am talking about the mass market, not the 1st purchasers who are laying out $7500 for the new sets tomorrow. S3 is a fast lifecycle company that is living on a 24 month old design in a 9 month lifecycle industry. A lot like GM trucks in 1990. Look at the truck design cycle now. Its 4 yrs just like cars. The question is whether S3 can survive with a mid range product in GX3. Unless it significantly outperforms the n4 product or even the 3DFX GLint chips or Voodoo2...design wins will be very hard to come by... stuck in the stock... BL