Wednesday, April 22, 1998
by Jeff Fischer (JeffF@fool.com)
ALEXANDRIA, VA (April 22, 1998) -- The Fool Port's hegemony over the market, like the Roman Empire's domination of Europe, has crumbled.
Call an ambulance!
Actually, of course, who cares. It was only one day, but an ugly day at that. The Fool Port lost 1.8% as our Internet stocks and 3Dfx suffered a frigid bout of selling, perhaps by heated-up investors eager to take their money and run for the summer-time hills. Meanwhile, the Nasdaq gained a healthy 0.72% on strength in Intel (Nasdaq: INTC) and Microsoft (Nasdaq: MSFT), the latter of which announced estimate-beating earnings once again after the market closed. While the former, Intel, is most likely playing a role in the two-day slide suffered by 3Dfx (Nasdaq: TDFX).
Yesterday Intel held a conference call to share its plans for future growth (its stock has since grown $7). In the conference call, Intel stated that next year it plans to integrate auxiliary chips for handling graphics and logic functions onto one piece of silicon, making investors in several small graphics-related chip companies nervous. It appears that Intel's statements began the 3Dfx slide yesterday, which gained momentum today.
But 3Dfx has repeatedly stated -- and did so again in its latest conference call -- that it doesn't view Intel as a direct threat, because 3Dfx targets the high-end user who wants the absolute best in technology. Though Intel's move to put graphics onto an all-inclusive chip will of course grab much of the average market, it shouldn't make a dent in the buying habits of users who are only satisfied with the best and fastest 3D technology available -- Voodoo technology from 3Dfx.
Granted, Intel does present a long-term threat to 3Dfx in the low-end market, and Intel's potential success in the graphics market overall could make the outlook for 3Dfx's coming 2D/3D product, Banshee, slightly more sketchy. But Banshee should be available soon, in the third quarter, and it should be one-of-a-kind in performance and versatility. Also, keep in mind that this news from Intel isn't even "new." It was expected. (Our 3Dfx message board believes that the termination of a 3 million share lock-up is also leading to selling of the stock, which sounds quite possible.)
Either way, we still believe that everything is well on track at 3Dfx and that no company can displace the technology leader with inferior technology -- at least not when the consumer has the incentive to purchase the leading technology. (I add this final line because Apple did lose to Microsoft while arguably having better technology. Apple didn't give consumers enough reasons to purchase its product, though, while 3Dfx technology is supported by hundreds of gaming titles that run best with it.)
The three analysts following 3Dfx recently increased earnings estimates for the year. The new estimate stands at $1.91 per share for this year and $1.75 per share in 1999 (next year is still anyone's guess, though, of course). At $26.50 the stock is trading at 13.8 times the 1998 earnings estimate. With $0.50 in earnings already under its belt, we can at least hope that $1.91 per share will prove to be too low. With the higher tax rate and higher share count for the rest of the year, though, we should consider this estimate reasonable. The current high estimate is $2.11 per share for this year and $2.20 next year.
We love what the company is doing, but we also recognize that the shares are risky. I even went so far as to write a cautious "bearish" side on the company for Dueling Fools. No decision is ever only black and white; each decision has many factors behind it, which is why only you can decide what investments are right for you.
Amazon.com (Nasdaq: AMZN) fell without news. The company will announce its first quarter results next week.
The most important facts from Innovex are that the company's new head interconnect flex (HIF) technology is ramping-up well. Innovex is producing nearly 1 million HIF units per week, up from 100,000 at the beginning of the quarter. Also, the company believes that this past quarter was its low point as far as operating results are concerned. Innovex expects orders to increase 5% to 10% per month in the near term, though visibility is not certain. This is the first time since last summer that Innovex expects a sequential increase in business, so hopefully it has indeed finally reached the bottom in that regard.
Many details about the quarter and the company are available in the conference call synopsis, linked above. If you have any questions after reading it, please let me know. Innovex trades at 17 times the 1998 earnings estimate and 11.5 times the 1999 estimate. The fiscal year ends in September.
Today Lucent Technologies (NYSE: LU) reported estimate-topping earnings of $0.14 per share. Analysts expected only $0.09 per share. The company grew revenue 25% to $6.1 billion -- impressive -- while net income more than doubled from last year. The stock made a new all-time high, and for the first time Lucent was granted a market cap of $100 billion.
Earnings estimates will rise, but right now Lucent trades at 48 times the current 1998 estimate and at 41 times the 1999 estimate (the fiscal year ends in September). Its valuation doesn't sound cheap, and... well, there are 13 million shares of Lucent sold short (as of April 15). That represents a potential loss of $26 million for those betting against Lucent on today's $2 rise alone. We're obviously betting -- and will continue to bet -- with Lucent for the long term. "Bet" isn't the correct operative word for us, though.
Lucent's conference call replay is available at 1-800-475-6701. The authorization code is 384772 and the replay is available until midnight on April 28.
Next up, DuPont (NYSE: DD) announced quarterly results today as well. The company (with an $85 billion market cap compared to Lucent's $99 billion) reported first quarter revenue of $11.3 billion, down menially from last year. Diluted earnings per share before charges totaled $0.92, two pennies above the estimate. The stock rose on the news.
Chemicals, fibers, polymers, petroleum, life sciences... DuPont is in a fine position in each. Like most Foolish Four giants, it's well-diversified. The stock trades at 20 times the 1998 earnings estimate and 18 times next year's projections, while yielding 1.60%. There are 7.7 million shares of DuPont sold short. We'll own this company until at least August of 1999. The stock has gained 27% since February 20.
Iomega (NYSE: IOM) continued its recent rebound. Over the last month the number of Iomega shares sold short jumped 37%, to 20 million shares as of April 15 (the stock was $7.25 then). Every dollar rise in Iomega potentially costs short sellers a collective $20 million. It's been an expensive two days! The new earnings estimates for Iomega call for four cents per share in 1998 earnings.
Finally, we're back in the money on our Trump Hotels (NYSE: DJT) short, even in this roaring market. This week Dueling Fools battle it out on Trump. There are 3.5 million shares of Trump sold short -- a fairly substantial amount given the average daily volume of only 209,000 shares. If the Fool went public with say, 10 million shares, how many shares would be sold short? Well, Trump himself would possibly take a large short position -- an eye for an eye.
DELIVER - Get Fool Portfolio Nightly Reports
delivered straight to your e-mailbox every evening!
Today's FoolWatch: all the latest in Fooldom.
Day Month Year History FOOL -1.83% 8.01% 21.24% 306.90% S&P: +0.32% 2.56% 16.44% 146.51% NASDAQ: +0.72% 4.46% 22.11% 166.27% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 72.75 1900.58% 5/17/95 1960 Iomega Cor 1.28 8.88 593.14% 10/1/96 84 LucentTech 23.81 76.44 221.06% 9/9/97 290 Amazon.com 38.22 87.25 128.27% 8/12/96 130 AT&T 39.58 63.25 59.81% 2/20/98 215 DuPont 59.83 75.94 26.91% 1/8/98 115 S&P Depos. 95.91 113.06 17.89% 2/20/98 270 Int'l Pape 47.69 54.44 14.14% 2/20/98 200 Exxon 64.09 72.94 13.80% 1/8/98 425 3Dfx 25.67 26.50 3.24% 4/30/97 -1170*Trump* 8.47 8.31 1.85% 6/26/97 325 Innovex 27.71 26.81 -3.24% 8/24/95 130 KLA-Tencor 44.71 43.00 -3.83% 8/13/96 250 3Com Corp. 46.86 35.06 -25.18% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 51652.50 $49070.63 5/17/95 1960 Iomega Cor 2509.60 17395.00 $14885.40 9/9/97 290 Amazon.com 11084.24 25302.50 $14218.26 10/1/96 84 LucentTech 1999.88 6420.75 $4420.87 2/20/98 215 DuPont 12864.25 16326.56 $3462.31 8/12/96 130 AT&T 5145.11 8222.50 $3077.39 1/8/98 115 S&P Depos. 11029.25 13002.19 $1972.94 2/20/98 270 Int'l Pape 12876.75 14698.13 $1821.38 2/20/98 200 Exxon 12818.00 14587.50 $1769.50 1/8/98 425 3Dfx 10908.63 11262.50 $353.88 4/30/97 -1170*Trump* -9908.50 -9725.63 $182.88 8/24/95 130 KLA-Tencor 5812.49 5590.00 -$222.49 6/26/97 325 Innovex 9005.62 8714.06 -$291.56 8/13/96 250 3Com Corp. 11715.99 8765.63 -$2950.37 CASH $11233.54 TOTAL $203447.73