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Technology Stocks : 3DFX -- Ignore unavailable to you. Want to Upgrade?

To: Kevin M. Reilly who wrote (4338)	6/18/1998 9:15:00 PM
From: steve host	Read Replies (1) \| Respond to of 16960

From Motley Fool - Great analysis - should be great tomorrow. Anytime you have a stock you like get whacked on little to no news (Nationsbank Montgomery made what I believe will prove to be an ill-fated HOLD call today on 3Dfx), there's the inevitable temptation to add money to it. The debate on this subject will rage on and on, and was most recently and eloquently presented in a Dueling Fools piece (6/3/98: "Averaging Down") on that very subject. It's kind of like whether the designated hitter improves baseball or doesn't -- strong opinions on both sides. (It does, by the way.) So far as averaging down goes, your Fool Portfolio managers don't do it. Let me explain why. Most stocks do not lose substantial value on no material news without there being some decent reason for it. Our stock-market experience has taught us that this "reason" or reasons often do not present themselves until well after a stock has already dropped. And then, if these reasons are material, the stock may drop more. As a stock gets thrown for repeated losses, many novice investors make the tragic error of scratching their heads, buying some more, scratching, buying, scratching more confoundedly, buying, scratching angrily, and then possibly even buying some more. And if that was a stock like Boston Chicken (click that link -- OUCH!), they lost it all. Or at least, 90% of it. My own intuition tells me that 3Dfx is no such stock. I really believe in 3Dfx, and I'm going to tell you why. Nevertheless, I acknowledge the possibility that I might be wrong again (having been wrong many times before) -- there might be some phantom info out there, and so we will not add to this loser. Now, as to why I believe in 3Dfx. Look at these numbers, dear Fools (in millions): 12/97 3/98 Sales 22.3 50.0 Net Income 2.1 7.5 Net Margins 9.4% 15.0% EPS $0.20 $0.50 These are the two most recent quarters. Sales growth has gone like this over the past four quarters (in millions): 2Q '97: $6.5 3Q '97: $10.0 4Q '97: $22.3 1Q '98: $50.0 2Q '98: ???? (ends June, but it should rock) This is very simply one of America's premiere small-cap growth companies. Not only did these numbers smoke existing estimates, but they involve a company whose products are selling directly through to consumers with a brand name that people recognize. 3Dfx also has a nice "moat" around its business, since many of the software programmers who are creating the great games of the next generation are using 3Dfx's proprietary Glide to do it (meaning unless you have a Voodoo 2 card, you can't get the full graphical delight). That advantage won't even be fully evident until Christmas of this year, when those games begin coming out. Explosive sales (slated to continue: current earnings estimates are for a consensus $2.00 per share this year), rising margins that are already in the double-digits, smart management, technology lead, branded product, etc. These are all the reasons we hold the stock, and think it's an excellent value at $16. Trading at a forward P/E of 8 right now, this stock has been held down by low institutional interest, lack of understanding of the industry or the product, and fears that some gorilla like Intel will come in and steal the show. Last I checked, Intel hadn't stolen the show from Creative Labs, ten years after that company came up with the standard for sound cards. And I believe that 3Dfx is in the midst of creating a standard for 3D graphics. Oh, one other thing holding the stock down: lack of knowledge about its upcoming product, a 2D/3D graphics card called Banshee. Unlike Voodoo, Banshee is not an "add-on" that gives superior performance. Banshee is an all-in-one graphics card solution, meaning that it will be installed in the factory as the default graphics card on as many computers as possible (from a 3Dfx shareholder's point of view). The specs for Banshee are due to be announced this Monday, June 22. We'll have our eyes peeled.