Warning: This is a very long post and contains many misspellings. Reading it requires patience and imagination ;D)
I agree to a point. I never feel comfortable investing in a one trick pony. And 3Dfx's market cap is at the very low end of what I'd consider acceptable (I'd much rather a $600 mil market cap). Still there are reasons why TDFX should not be ignored. Here what I'm really doing is not to toute TDFX, rather I'm discussing a trading and investing methodology and using TDFX as an example.
The single biggest problem with TDFX is what you've described; namely a limited product range and an overly competetive market niche. My opinion is that 3Dfx is improving their product line by instead of just being a high-end gaming graphics company to being also a main-stream-great-performance-at-a-good-price company. Their new "low-end" chip, Voodoo Banshee, is taking the competetion by storm and has won a few OEM wins, including being the standard graphics card on one of Gateway's lines. This is still too narrow a product line than I like, but at least this pony now has two tricks instead of just one. They are also persuing the set-top box market, and a win there will be a great achievement, though one cannot count on unhatched chickens. So the risk still remains. But there are mitigating factors and we must look at both the risks and the rewards closely.
(1) The Competetion Because of the cut throat conditions in the graphics market, most (though by no means all) of 3Dfx's competetion are in serious financial trouble. The issue here is whether 3Dfx will join them or survive them. I think it will survive them because the competetion is in poor shape and 3Dfx is the new blood and financially much stronger. 3Dfx's main competetions are (in order of comparative product lines) nVidia, S3, and ATI Tech. Despite having a modestly superior product nVidia will almost certainly be bankrupt in a year from now and S3 (which has a poorer product) just reported their worst quarter ever and faces sever challanges. Delays in ATI's Rage 128 chip has meant that they've missed the boat on the current OEM cycle and their best bet is the Spring of 99 cycle (by which time 3Dfx is suppose to have a new product). So while the competetion is fierce, it is dying IMO. The moral of this section is that one must always evaluate the competetion, its history, and the industry conditions. So far it looks tough to me, but the worst seems to be over.
(2) The Competetive Advantage As you've pointed out, a new and better chip may come along and leave 3Dfx in the dust. So far the company has proven that they are very capble of maintaining their lead. In fact, it took nVidia almost 3 quarters to come up with the only real competing product and prior to that it took the industry almost another 10 months to produce a competing product for 3Dfx's last chip. So it seems to me that 3Dfx is maintaining a 9 months lead and is busy maintaining that lead. Still, the possibility of the emergence of a new and better product exists. So what you want is a barrier to entry. As it turns out, the management agrees with this point and is busily trying to establish this barrier. They are doing this from 3 angles. First, they have a partnership with ERTS (the largest game maker) and other developers to release games for 3Dfx chips first, and later (say 2 months later) for other graphics cards. I don't think many kids will be happy that they can't play the same games as Joey because they don't have a 3Dfx card. Gamers are not usually patient people. So this should be a good boost to 3Dfx, even if a somewhat better chip exists. Second, they have partnerships with EB and Babage to push their products beyond all else and place stickers on various games that indicate it is best played using a 3Dfx card. The aim here is to dominate the retail stores as much as they can. And third, they have an aggressive marketing gampaign to present themself as the "gaming platform" of choice (instead of letting the card makers get the credit). if and this is a big if, this approach works, 3Dfx will become the standard for home graphics in the same way that Sound Blaster is the standard for PC sound. The difference here is that unlike Sound Blaster, 3Dfx's protocol is not easy to clone. The moral here is to insist on barriers to entry. So far they are not here, but they are being built. The question is, is the stock cheap enough to compensate for the risks? Only you can answer this.
(3) Entry point I recently updated my profile with a quote from John Meynerd Keynes. "Markets can stay irrational longer than you can stay solvant", he said. This is very true. I have lost much more money on stocks that I was right about than those that I was wrong. TDFX fell from the height of 35.25 about six months ago, to the low of 8 about six weeks ago in the face of improving fundamentals (there is a lesson here for the effecient market theorists; was it too high then, or is it too low now). Since then, the stock has moved up-sideways-up... The average trading volume has dried up from over 650,000 shares a day, to under 200,000 shares. These are the classic signs of a bottoming stock which is poised for an extended ralley (not an extended ralley does not mean straight up for the next six months). It seems that anyone who wanted to sell the stock has already done so and those who are holding it are not interested in selling at current prices. One of the most reassuring signs was that a week after the company pre-announced a surprisingly negative earnings, the stock was higher than before the announcement. This and the fact that the earnings has been released, means that the down side is extremely limited. When a down trending stock starts to move up on bad news, buy it because it won't go any lower. Of course if I was only interested in not losing money I'd keep my cash in a bank. So there has to be catalyst to push the stock higher. The catalyst in my opinion is the pending OEM announcements and the anticipation of a great Christmas season, along with a large short interest that needs to be covered. This is of course speculation on my part only. Your mileage may vary.
(4) Exit Point If you learned nothing else from the movie Ronin, learn this: never enter where you don't know how to get out of. No matter what you invest in, winning or losing, long, or short, you must have an exit strategy. This is a function of many things: how much loss are you willing to take and how much do you expect to be compensated, how fast of a trader are you (day trader vs. multi-year investor) and how will the market/economy/fundamental outlook changes affect your decision. These are very personal decisions. For now I can tell you this. The support level is ~10. The first major resitance level is ~15. The stock is at 11. So you have about 10% down side risk and 40% upside potential. Many people would be happy trading this range alone, but I'm not. I intend to buy the stock as it approaches its support levels and sell covered calls on it as it nears the resitance levels. The options are very expensive and well worth the risk of keeping the stock to their expiery date. I think that 3Dfx has a realistic chance of capturing 40% of the home PC market within 3 years and that will be revenues of almost 1 billion dollars. I'll let you calculate what that can do to the stock price. So long as I believe in this (for some unbelievable) future, I will accumulate the shares (smartly, and without fighting the tape). The moment I change my mind, I will sell them (again, smartly and without fighting the tape). I guess the moral here is one who does not change his mind, will soon have no change to mind
Best regards,
Sun Tzu |
