Rule Breaker Portfolio

Rule Breaker Portfolio
3dfx Flattened
Plus, be a guest on Fool Radio!

By Jeff Fischer (TMF Jeff)

ALEXANDRIA, VA (Nov. 19, 1999) -- 3dfx (Nasdaq: TDFX) announced quarterly results last night that failed to impress investors, sending the stock lower to end the week. The company lost money on operations again, perhaps giving an ongoing indication that getting into the board manufacturing business is an impediment to profits.

Sales leapt in the third quarter to $105.8 million from $33 million last year, but there's a saying (that I will make up right now) that goes like this: a growing cow ain't much good if it ain't giving ya any milk. Losses in the quarter reached $17.6 million, which compares to net income last year of $3.1 million. For the past nine months, the company lost $31.4 million, compared to net income last year of $19.6 million. Earnings in the third quarter were a negative $0.73 per share compared to a consensus estimate (by just two analysts) of a loss of $0.54.

Gordon Campbell, chairman of the board of directors for 3dfx said, "Our financial performance did not meet our goals as our gross margin was below expectations primarily as a result of higher memory prices; a greater OEM mix than we had anticipated, in addition to expedite charges for product resulting from the recent Taiwan earthquake."

Whatever the reasons, the company hasn't been profitable since it began making its own boards, and this industry is typically unforgiving and "low margin" anyway. Part of the attraction behind 3dfx two years ago was that its products were outsourced, leaving 3dfx a profit margin that it essentially set for itself based on the price at which it sold its technology in OEM partnerships. The downside of this arrangement was that 3dfx was at the whim of board manufacturers and product material shortfalls were not uncommon.

3dfx said that it was taking its fate into its own hands by manufacturing its own products when it acquired a manufacturer, meaning that it shouldn't suffer shortfalls of inventory anymore. It is suffering all of the expenses of this "new" business, however, and this, so far, seems to be putting the company in a weaker (highly unprofitable) position than it was in when it was outsourcing.

After losing an estimated $1.48 per share in fiscal 2000, four analysts expect 3dfx to earn $1.16 per share in profits in fiscal 2001. As longtime readers know, though, these estimates have usually been incorrect. We dubbed 3dfx as something less than a Rule Breaker a few months ago, but it was hoped that the company would be profitable by the fourth quarter of this year. Because, despite its many challenges, 3dfx continues generate very strong sales in its Voodoo3 product line. In fact, 3dfx products often capture all five of the top spots (in their product category) in the U.S. retail market. Plus, Voodoo4 and Voodoo5 were just announced, promising a strong end to the year. It doesn't appear that profitability can be reached in the fourth quarter now, however, and that's doubly unfortunate given how quickly the company is burning through cash.

If I owned this stock, well... I wouldn't be interested in owning it. That's my opinion, though, and it's highly biased. I've generally been uninterested in 3dfx as an investment (not as a company -- there's a difference, of course) since February 1998, when I wrote the bearish side of a Dueling Fools on 3dfx. I'm an idiot when it comes to technology specifics, however, but luckily the Fool has the most intelligent board discussion of 3dfx anywhere. That's where you should go to discuss this technology leader. (I do admire the company's products, I just don't love its industry, generally, as an investment.) Talk about 3dfx here.

Radio Free Fool
Speaking of talking, you can talk on the Fool Radio Show next week, and then hear yourself on the air next Saturday while you spend time around the radio with your family (impress 'em all with your Foolery!).

The Motley Fool's radio show producer, Mac Greer, recently shared that the Fool is pre-recording its Thanksgiving Fool Radio Show on this Monday, November 22, from 4:00 p.m. to 7:00 p.m. ET. Before recording this show, Mac would like to lineup phone calls with you. Specifically, we would like to hear what you're thankful for in the financial world. Maybe it's a stock, maybe it's a piece of advice, maybe it's that you said "adios" to your full-service broker -- anything that you're thankful for related to Foolishness, and generally to investing.

If you'd like to be on Fool Radio, please e-mail Mac at MacG@fool.com, and send him a short description of what you're thankful for and a daytime phone number where you can be reached on Monday. Mac can't call everyone, of course, but he will call as many Fools as he can.

An Odd, Odd Day
Finally, longtime Fool "BHaber" sent this to me today. He said: "Feeling a little 'odd' today? Today, 11/19/1999, is a day containing only odd digits in its date. How unusual is this? The next day that this will happen is.... January 1, 3111."

So, there's another reason to celebrate this Friday. Have a great weekend!

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What do you think?
Please post your thoughts about tonight's report on our Rule Breaker Strategy board. Alternatively, if you have ideas, analysis, or questions about a particular Rule Breaker company, pull up a chair at the roundtable discussion on our Rule Breaker Companies board.






Rule Breaker Portfolio

11/19/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AMGNAMGEN INC1/2$94.69
AMZNAMAZON.COMUnch.$77.94
AOLAMERICA ONLINE-1 7/16$158.00
ATHMAT HOME CORP CL A1/8$51.31
CATCATERPILLAR INC-6 3/4$49.19
CHVCHEVRON CORP-2 1/16$93.19
DDDU PONT (EI) DE NEMOURS-1/2$61.06
EBAYEBAY INC-6 5/16$145.94
GTGOODYEAR TIRE & RUBBER CO-1$37.00
IOMIOMEGA CORP-1/8$4.31
SBUXSTARBUCKS CORP-1 3/4$28.38
TDFX3DFX INTERACTIVE-1 3/8$9.06

  Day Week Month Year
To Date
Since
8/5/94
Annualized
Rule Breaker -.70% 5.08% 15.54% 56.86% 1,477.35% 68.40%
S&P 500 -.21% 1.86% 4.33% 15.68% 210.21% 23.85%
S&P 500(DA) -.21% 1.86% 4.33% 16.26% 224.47% 24.91%
NASDAQ .66% 4.60% 13.58% 53.66% 367.83% 33.85%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
8/5/942200AOL0.917$158.0017,128.22%
9/9/972640AMZN3.188$77.942,345.09%
5/17/951960IOM1.280$4.31236.80%
12/16/98580AMGN42.889$94.69120.77%
12/4/98900ATHM28.040$51.3183.00%
2/26/99300EBAY100.527$145.9445.17%
2/23/99180CHV79.169$93.1917.71%
2/23/99300CAT46.964$49.194.73%
2/20/98260DD58.844$61.063.77%
7/2/98470SBUX27.955$28.381.50%
2/23/99290GT48.715$37.00-24.05%
1/8/98425TDFX25.667$9.06-64.69%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
8/5/942200AOL$2,017.62$347,600.00$345,582.40
9/9/972640AMZN$8,415.03$205,755.00$197,340.00
12/16/98580AMGN$24,875.50$54,918.75$30,043.25
12/4/98900ATHM$25,236.13$46,181.25$20,945.13
2/26/99300EBAY$30,158.00$43,781.25$13,623.25
5/17/951960IOM$2,509.63$8,452.50$5,942.87
2/23/99180CHV$14,250.50$16,773.75$2,523.25
2/23/99300CAT$14,089.25$14,756.25$667.00
2/20/98260DD$15,299.44$15,876.25$576.81
7/2/98470SBUX$13,138.63$13,336.25$197.63
2/23/99290GT$14,127.38$10,730.00($3,397.38)
1/8/98425TDFX$10,908.63$3,851.56($7,057.06)
  Cash: $6,381.51  
  Total: $788,394.30  



Note
The Fool Portfolio was launched on August 5, 1994, with $50,000. It was renamed the Rule Breaker Portfolio in October 1998. The investing strategy began with the first investments of the Fool Port and has evolved with time and experience. In July 2001, the portfolio began adding $12,500 each quarter (We missed Jan. 2002, so we added $25,000 in April 2002). We skip a quarter if we have enough uninvested cash or cash available in stocks we would prefer to sell to make new investments. All transactions are shared and explained publicly before being made, and returns are compared in each week's column to the S&P 500 (including dividends where noted) and the Nasdaq composite. For a history of all transactions, please click here.