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

To: Greg S. who wrote (7646)	9/24/1998 3:52:00 PM
From: Don Westermeyer	Read Replies (2) \| Respond to of 16960

I'm surprised nobody has mentioned Briefing.com's piece today: briefing.com Here are some snippets (sorry for the mess, no easy way to cut and paste into this window) - <earnings chart> But, just one week ago, the company issued a warning that third quarter results would be a loss of several million dollars. With 15.5 million shares, "several" might make the per share loss as much as $(0.30) a share. However, the quarter should look mildly profitable due to a legal settlement with Sega Entertainment for contract violation. Although financially accurate to count settlement proceeds as revenue, the investor should consider that 3Dfx's product sold so far under expectations as to cause a loss of "several" million dollars, instead of the expected profit of $7 million dollars this quarter. At gross margins of nearly 50%, that's a revenue shortfall of nearly $20 million dollars. Since last quarter's revenues were only $58 million, what does that tell you about the underlying business? Quite simply, it is extremely unpredictable. Wall Street does not like unpredictability of this size. The press release highlights the biggest problem with 3Dfx Interactive, and all niche technology companies, actually. Because technology changes so quickly, companies with small product sets often have a feast or famine life style. New product introduction must be continuous, and with essentially only one product set, the Voodoo graphic chips, 3Dfx must have a hit with every new version. And you need a new hit version every six months. That's hard to do consistently. From reading the warnings release, it appears that 3Dfx made a strategic decision to add retail distribution to its product set in a big way and overbuilt inventory. While the company states that the holiday season should increase sales, and clear out the backlog, there is no reason to take this at face value. For details, we have to wait for the conference call after the earnings report on October 15. First Call shows that all six analysts that follow the company were expecting earnings to be around $0.50 per share as recently as one week ago, prior to the warning on September 14. However, the stock fell only 2 points that day, from 10 13/16 to 8 13/16. That is too small a drop for such a drastic change in earnings expectations. We suspect that the company had been quietly lowering expectations to analysts prior to this actual announcement, while balancing it with encouraging news on the Sega lawsuit. Stock Performance TDFX stock has certainly been beaten down. All during 1998, while reporting higher revenues and earnings, the stock declined from a high of $34 in April to its current $11 per share. However, there are numerous days when the stock traded with 25% movements. Traders or options players could love the action. <stock price chart and a pat on the back for calling the decline> Briefing's Conclusion This is a trader's stock at this point. With lots of turnover, and wide swings from press releases, the advent and disappearance of momentum players, this is the type of stock a serious trader can enjoy. But you have to be as ready to short it as buy it and you have to read daily charts. Any emotional attachment to the company will be frustrating. Although the year-to-date performance is straight down, we think 3Dfx is still in for choppy waters. There will probably be opportunities, particularly in the week prior to October 15, for daytraders to make successful trades. Read the movement of the stock in the morning to gauge the direction, especially on higher than average volume. We expect high volume on the stock before and after the coming earnings announcement. From a long term perspective, there are just too many unmanageable risks for Briefing to feel comfortable. The chip marketplace evolves so fast, that small chip makers simply cannot make a single mistake in order to keep growth curves going. 3Dfx may just have a fantastic quarter. But sustaining growth is the problem.It just requires more faith in the company than we think is reasonable. If you are close to the company or the industry, maybe you can have the level of faith required.