The stock plunge this week was caused by a number unfortunate factors that increased selling pressure. First, TDFX decides to announce earnings the day before options expire. I don't know what management was thinking! This was a terrible idea. I guess they may have thought that the stellar earnings would convince some of the option holders to keep the stock after exercising the option (or even convince the option writers to buy more stock to replace the stock they were forced to sell). Maybe they thought it would convince the holders of the restricted stock not to sell. This was the first quarter in which TDFX options were offered. The offering also followed the first large earnings surprise for the stock. The options were snapped up by speculators. Many of them believed that Voodoo II would be the last hurrah for TDFX. Growing competition, particularly from that 500lb gorrilla called Intel, would soon limit the potential of TDFX. I know, I was one of those speculators. (I own a June 30 option.) Those speculators exercised their options, sold their stock, and took their profits. The earnings may have been good enough to convince the speculators to buy more options but not keep the stock. Options selling limited the upside momentum for TDFX on Friday. Selling pressure continued on Monday as those investors, who waited to see market reaction to the earnings announcement, took their profits. Normally, this would have been the end of the selling pressure. But, as is now widely known, on Tuesday, restrictions were lifted on 3.4 million shares of TDFX bought in early March for $23.75. With TDFX now trading at about $30, some could not resist cashing some of their holdings in for a 20-30% profit. That evening, Intel showed off their 3D chipset to analysts and talked about incorporating the technology into future CPUs. Panic selling ensued the next day. Some sold because of the analysts conference inflamed fears that competition would limit the future for TDFX. Some sold because of paranoia that the street new something that they didn't; they couldn't understand how a company, with such stellar earnings, could drop like a rock? It was a simple supply and demand problem. The stock price had to absorb alot of new supply and downward resistance was weak. The Intel conference and the two Oppenheimer analysts reiterating worries about the stock didn't help. My personal guess was that the stock would not go down below 25 1/2. Most investors I know would not settle for less than 8% profit; so the investors of the restricted stock would not sell for less than 25 5/8. But panic probably drove the stock briefly into the 24 level. I didn't sell my option. In fact I bought more when the stock dropped below 25 1/2. (I actually didn't have enough spare cash to buy an even lot of TDFX shares.)
So what changed my mind about TDFX? Why have I decided to take a larger risk in the stock? The best advice I have been given about investing is this. Don't automatically sell an investment when it reaches your target price or sell date. (For options, I set a sell date). Instead, use the target price or sell date as an opportunity to re-evaluate the fundamentals of the investment. If satsified that it is still fairly priced, keep it. Otherwise, sell it. I had planned to sell my option last Friday. (And some arm-chair investors will argue that I should have. I could have used the money to buy two of the same options Thursday. I prefer to average down rather than try to time the market. If I think a stock will go down in the short term but climb high in the long term. I will buy half the shares I plan to invest now and the other half when it actually goes down. If it doesn't and actually goes up, then I still have a profit and use the remainng money on some other undervalued stock. There's always is one.) I didn't sell my option. I was stunned by the earnings. I expected something on the order of 30 cents, not 50. I chose to do more research into the stock and analyze the conference call. I concluded that this is the year for TDFX and the reason is simple: content. This Christmas season, 3D games will flood the market and only the Voodoo family of graphics chips (particularly the Voodoo II) will run all of them with the highest quality detail. Nearly every box will have the 3Dfx logo on it, broadening brand-name recognition for 3Dfx products. I have taken a look at the major concerns and am confident that TDFX will overcome them. Here is my analysis:
1. Oppenheimer analysts state that demand for the Voodoo II will dry-up after this quarter. These analysts would probably have avoided Creative Labs in the late 80's because it built sound devices for the "gaming" market. By their reasoning, you should also avoid Nintendo. Why hasn't the market for Nintendo64 dried up yet? Everyone who wants one should have one already, right? Just like sound, 3D will become ubiquitous among PCs. This is a growing market not a stagnant or shrinking one. Many of the young, avid gamers already know what Voodoo is.
There is still a large untapped market of older gamers who haven't caught the Voodoo craze. I don't own a Voodoo card. Only one person in my office owns one. But there are several of us who are considering a purchase. The market for games is also growing; new people discover the world of computer gaming every day. Also, business applications and Internet software are starting to experiment with 3D effects. Voodoo doesn't have to be just for games.
2. Intel, nVidia, and/or Matrox is coming out with a product better than Voodoo II. And TDFX will eventually release a product better than Voodoo II as well. TDFX is a moving target. Today nothing beats the 3D acceleration of Voodoo II. Nothing has the breadth of titles that take advantage of its 3D acceleration. Right now, Voodoo II has a speed and a content advantage. I have seen pre-release performance numbers for some of these Voodoo killers. The main problem with pre-release numbers is that
they use benchmarks reflecting today's 3D software. Today's software has mainly been designed for Voodoo I capabilities. That aren't any titles that take full advantage of Voodoo II. (Diamond was not originally planning a 12MB Voodoo board for this very reason.) Also, benchmarks say nothing about when a product will actually be released. The content advantage will remain for at least this year. Many competitors have been talking about support from major game companies for their boards. But when you look at the list of actual games, its fairly small. Most major game companies only produce a small amount of games. Most of the time they act as distributers for much smaller game developers. (And, before you dismiss small development shops, look at the top selling titles for the last couple of years. Most of them came from small, independent game companies.) These game development shops don't have the resources to tune their products for every 3D chip on the market. Many only invest in DirectX and Glide. Right now, DirectX is less capable and more complex than Glide. Microsoft claims that DirectX 6.0 will be as powerful and as simple as Glide; but Direct 6.0 won't be done for a few more months. That could be too late for this Christmas season. In the meantime, support for the other 3D chips is mostly limited to the capabilities of DirectX. In short, DirectX won't level the content playing field until next year. By then, TDFX will have carved a larger market share and brand-name recognition. It will continue to sell product as long as its as good or better than the competition. (Nintendo has survived both Sega and Sony thus far.)
3. TDFX will sink if Banshee isn't as powerful as a Matrox Millenium II and the Voodoo II combined. Banshee only has to be a good performer, not an excellent performer. The reason, once again, is Voodoo's content advantage. Right now, the mainstream application for 3D is games. And games are a consumer product. More than half of the computers sold to consumers today are sub-$1000 PC's. The PC market has risen to cut-throat competition. PC venders are looking for any advantage to get a leg up on the competition. Banshee will have an advantage over other graphics chips in the consumer market by the fact that it will have better support for 3D games. Thus, Banshee only has to perform better than other graphics chips used in consumer PCs. Imagine the following scenario. Compaq's savy Presario engineers come up with a great idea to lead the competition this holiday season. They'll put Banshee chips in the Presario line and name the machines Presario3D. They'll bundle some best selling PC's games with the system and the marketing staff will force retailers to agree to keep those games running on the floor models. Successful sales of the Presario3D cause NEC (Packard Bell) and Acer to follow Compaq's lead. (IBM, using ATI chips, figures that ATI's 3D acceleration is good enough. Once again, they'll miss a market opportunity and won't realize it until the Christmas season is nearly over :-)) Banshee could also find its way into Gateway's Destination PC's. Anyway, if Banshee really were as wonderful as people claim is necessary for success, why would you buy a Voodoo II board?
My advice is to buy TDFX now while its cheap. We've just been through a catharsis of selling and the stock is poised to jump on any good news. |
