The Enigmatic 3Dfx
Drop in Amazon hurts; Iomega preannounces
by David Gardner
(DavidG@fool.com)

ALEXANDRIA, VA (June 18, 1998) -- Hwwwwwww-WHACK!

That was the sound of the Fool Portfolio today, getting struck like a golf ball on the first tee of the U.S. Open. Oh yeah, baby. Got ALL of that.

In a flat market (S&P off 0.07% and Nasdaq off 0.21%), the nation's original, best-known, and winningest real-money online portfolio lost 1.94% of its value to close the day -- much of that loss occurring in the final hour.

One need look not much further than the volatile Amazon.com for the reason, as our shares of AMZN suffered long-awaited profit-taking, shying $7 1/16 to close at a bid of $71 15/16. Yes, I say "long-awaited," because like most people I was shocked to see the stock gain $35 in value over the past eight consecutive trading sessions preceding today. That was eight consecutive new highs, followed by a ninth one today that these shares could not abide.

Take a look at our daily chart on Amazon.com (I love these charts -- a great new addition to Fooldom -- click "chart" from the many accessible places at www.fool.com and then select your time period -- just awesome) and you'll see that $5 of that $7 loss came in the last hour, on heavier volume, as short-term players (and probably a few long-term players as well) cashed in. Volume was heavy all day (5.3 million shares, vs. average daily volume of 1.8 million), and it was evident from the first half hour that the Great River was clogging with sediment. So be it. We're willing to take our seven-point losses along with our seven-point gains.

Also hurting the FoolPort today was the inexplicably weak 3Dfx (Nasdaq: TDFX), down $2 to $15 15/16. The stock has been a dog since our January purchase, off 38%.

One thing we can observe up-front is that despite another fine year for the stock market, certain high-technology sectors have foundered. We have four stocks in the Fool Portfolio that are all involved in computer hardware: KLA-Tencor (monitoring systems for chip manufacturing), 3Dfx (3D graphics cards), 3Com (networking gear), and Innovex (lead-wire assemblies for hard drives). Each of these is the #1 company in its industry, except for 3Com. And each is now off a minimum of 37% for our portfolio.

Can you say "industry rotation"? That's what's happened, as institutional money managers (ever fickle, sometimes smart) have moved their bucks out of hard-asset stocks and into "softer" ones, like Internet stocks. The Fool Portfolio, now up 28% for the year (more than doubling the market indices), has certainly been a beneficiary overall, though we'd prefer that both types of assets were considered more valuable.

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.

Meantime, we'll look on from www.fool.com (the message board is hopping out of control) with wonder at the depressed share price, but bide our time... Foolishly.

Iomega (off $1/16) came out after market close to preannounce a second-quarter loss, which isn't at all unexpected. It'll be interesting to see how the stock does tomorrow. On deadline, I'm not able to go into much more detail now, but we'll talk about that some in an upcoming Fool recap. I did get a note from Eric Turkewitz, who penned yesterday's Post of the Day, which happened to be about Iomega. Eric urged me to compare the press release today with his note of yesterday: "Dead bang," he wrote. "As if they read my note." Judge for yourself: here's the press release. And then join Eric and others at our Iomega message board for more intelligent thoughts than you'd find here, anyway.

Fool on!

-- David Gardner, June 18, 1998

[Related message boards: Amazon.com I 3Dfx ]

WE DELIVER - Get Fool Portfolio Nightly Reports
delivered straight to your e-mailbox every evening!

Today's FoolWatch: all the latest in Fooldom.


06/18/98 Close

Stock Change Bid ---------------- AMZN -7 1/16 71.94 AOL - 1/8 93.88 T - 3/4 62.25 DD +1 3/16 76.00 DJT - 7/16 7.44 XON - 1/4 70.75 INVX - 1/2 13.13 IP - 5/16 44.25 IOM - 1/16 6.31 KLAC + 5/8 27.81 LU -1 1/2 72.94 COMS +2 9/16 27.19 TDFX -2 15.94 SPY - 1/2 110.97
Day Month Year History FOOL -1.94% 11.00% 27.88% 329.16% S&P: -0.07% 1.43% 14.01% 141.35% NASDAQ: -0.21% -0.35% 12.89% 146.15% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 93.88 2481.51% 5/17/95 1960 Iomega Cor 1.28 6.31 393.01% 9/9/97 580 Amazon.com 19.11 71.94 276.42% 10/1/96 84 LucentTech 23.81 72.94 206.36% 8/12/96 130 AT&T 39.58 62.25 57.29% 2/20/98 215 DuPont 59.83 76.00 27.02% 1/8/98 115 S&P Depos. 95.91 110.97 15.71% 4/30/97 -1170*Trump* 8.47 7.44 12.18% 2/20/98 200 Exxon 64.09 70.75 10.39% 2/20/98 270 Int'l Pape 47.69 44.25 -7.22% 8/24/95 130 KLA-Tencor 44.71 27.81 -37.80% 1/8/98 425 3Dfx 25.67 15.94 -37.91% 8/13/96 250 3Com Corp. 46.86 27.19 -41.99% 6/26/97 325 Innovex 27.71 13.13 -52.63% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 66651.25 $64069.38 9/9/97 580 Amazon.com 11084.24 41723.75 $30639.51 5/17/95 1960 Iomega Cor 2509.60 12372.50 $9862.90 10/1/96 84 LucentTech 1999.88 6126.75 $4126.87 2/20/98 215 DuPont 12864.25 16340.00 $3475.75 8/12/96 130 AT&T 5145.11 8092.50 $2947.39 1/8/98 115 S&P Depos. 11029.25 12761.41 $1732.16 2/20/98 200 Exxon 12818.00 14150.00 $1332.00 4/30/97 -1170*Trump* -9908.50 -8701.88 $1206.63 2/20/98 270 Int'l Pape 12876.75 11947.50 -$929.25 8/24/95 130 KLA-Tencor 5812.49 3615.63 -$2196.87 1/8/98 425 3Dfx 10908.63 6773.44 -$4135.19 6/26/97 325 Innovex 9005.62 4265.63 -$4740.00 8/13/96 250 3Com Corp. 11715.99 6796.88 -$4919.12 CASH $11662.57 TOTAL $214577.91

Are you a Foolish investor?
The Motley Fool Recommends...
Industry Snapshot
New format! A stock idea, industry overview, top players, and financials -- every two weeks! Get more info or order.

Fool Port Reports
The nightly scoop on the Fool Port Report, delivered straight to your e-mailbox. Get more info or order.

Foolish Eight Stock Screen
Here at Last! Foolish Eight Stock Screen. Get more info or order.

Other Fool Products...
Subscriptions
Primers
Reports
Investing Tools
Books
Fool Gear

Shop FoolMart!