Red Voodoo
3Dfx Conjures Up a Loss

by Jeff Fischer (JeffF@fool.com)

ALEXANDRIA, VA (Sept. 14, 1998) -- The Fool Portfolio underperformed the S&P 500 today because Amazon.com declined. This cash flow positive e-commerce infant was essentially held to a market value of $3.7 billion. Any complaints? Anyone?

Next week we'll conclude our look at Amazon.com (Nasdaq: AMZN) that we began two weeks ago. I'll provide all the Amazon numbers that I have on the message board and then point to it from this column, and we'll "tawk about it."

Today the maxim "no news is good news" held true. 3Dfx (Nasdaq: TDFX) announced news that was, indeed, bad. The company stated that third quarter revenues will be lower than anticipated due to a stronger-than-expected seasonal slowdown. That's mumbo jumbo for, "We aren't selling as much as we hoped."

Too great a quantity of Voodoo2 remains on retail shelves around this mall-covered country of ours, although the holiday season might salvage our Voodoo-selling entity. Management expects a seasonal increase in retail sales during the fourth quarter, and it hopes that inventory will clear out and sell through will improve significantly to end the year.

But that's then, and this is now.

Due to current slow sales, 3Dfx expects to go from black voodoo to red. The company is banking on a pre-tax operating loss of several million dollars this quarter, although thanks to the recent settlement of a lawsuit with Sega, it should still be profitable. However, you can't include one-time gains in a long-term financial model, or in this year's earnings per share.

The earnings estimate of $0.47 per share for this quarter obviously won't be met. The $1.88 per share estimate for the year will likely be knocked down to around $1.30 to $1.55 (that's my guess). With $1.04 in earnings already in 3Dfx's bank for the first half of 1998, that would mean a slightly slower fourth quarter than the first two quarters of this year (following a loss in the third quarter).

Why?

It's hard to see the company going from a loss to a blowout fourth quarter that tops the first two quarters (which were $0.50 and $0.52 in earnings per share, respectively) -- although, yes, that could happen. However, it's not likely, in my opinion, that the seasonal slowdown is only "seasonal." Intel (Nasdaq: INTC) just announced that its third quarter will be stronger than anticipated due to higher demand in the U.S. and Europe. Intel hinted that PC inventories might be clearing. If that's true and sales are healthy, you might expect more sales of 3D gaming chips rather than a slowdown.

So are there larger problems at 3Dfx? The company still sells the best 3D product and its technology is branded with hundreds of games and hundreds more to come, so perhaps the only problem is market demand. Which would be a problem indeed. In a world of declining PC prices, perhaps a high-end 3D chip seems more and more of a luxury by comparison, while other (cheaper) 3Dfx offerings are lower-margin products.

Either way, perhaps this news was already built into the stock at the current $10 price. 3Dfx is trading at less than 9 times trailing earnings and at 7 times a new lower guesstimate of $1.40 per share in earnings this year. However, the prospect of losses won't calm any nerves. The company's book value of $7.52 per share might help the stock sustain the news -- at least somewhat.

For more research and information on the company, draw a quote on 3Dfx at http://quote.fool.com. From there, not only do you attain reams of data, earnings estimates, and past financial results, but you're given a convenient link to the very active 3Dfx message board.

On the message board one Fool named AlphaWolf wrote, "The way this stock reacts to news, it will probably go up a point or two." Another Fool asked why everyone was panicking, pointing out that nobody sounded like a long-term investor. He then Foolishly shared international sales data.

I'll be reading that board tonight as well, as the message board is just now digesting the news and this column itself was written extremely quickly (twice). The 3Dfx news came soon before deadline, and then the computer Gods destroyed this column just before it was published. Like the Bionic Man, it was quickly reconstructed.

Speaking of those computer "Gods..."

The Year 2000 Bug:

The Fool has a great new series of articles beginning today on the Year 2000 Bug. The fabled "coming of the Bug" seems like a technology nerd's equivalent to Armageddon. Some people are storing bottled water now, and moving to isolated cabins in the woods (sure, it's easy to see the logic of that!). Check out part one of a five-part series today. It's everything that you ever wanted to know about your impending fate!

Fool on!

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09/14/98 Close

Stock Change Bid ---------------- AMZN -2 3/8 73.69 AOL +2 1/4 97.88 T +1 3/4 57.69 DJT - 1/8 4.25 DD +2 7/8 59.50 XON - 1/16 70.50 INVX + 1/4 11.25 IP + 11/16 42.38 IOM + 3/16 4.00 KLAC -1 3/4 22.75 LU - 3/4 77.00 SBUX - 1/8 31.94 COMS - 15/16 27.44 TDFX --- 10.81
Day Month Year History Annualized FOOL +0.63% 6.12% 22.16% 309.96% 40.96% S&P: +2.05% 7.54% 6.11% 124.63% 21.77% NASDAQ: +1.47% 11.11% 6.08% 131.30% 22.64% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 97.88 2591.51% 9/9/97 580 Amazon.com 19.11 73.69 285.58% 10/1/96 84 LucentTech 23.81 77.00 223.42% 5/17/95 1960 Iomega Cor 1.28 4.00 212.40% 4/30/97 -1170*Trump* 8.47 4.25 49.82% 8/12/96 130 AT&T 39.58 57.69 45.76% 2/20/98 200 Exxon 64.09 70.50 10.00% 2/20/98 215 DuPont 59.83 59.50 -0.56% 2/20/98 270 Int'l Pape 47.69 42.38 -11.15% 8/13/96 250 3Com Corp. 46.86 27.44 -41.45% 7/2/98 235 Starbucks 55.91 31.94 -42.88% 8/24/95 130 KLA-Tencor 44.71 22.75 -49.12% 1/8/98 425 3Dfx 25.67 10.81 -57.87% 6/26/97 325 Innovex 27.71 11.25 -59.40% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 69491.25 $66909.38 9/9/97 580 Amazon.com 11084.24 42738.75 $31654.51 5/17/95 1960 Iomega Cor 2509.60 7840.00 $5330.40 4/30/97 -1170*Trump* -9908.50 -4972.50 $4936.00 10/1/96 84 LucentTech 1999.88 6468.00 $4468.12 8/12/96 130 AT&T 5145.11 7499.38 $2354.27 2/20/98 200 Exxon 12818.00 14100.00 $1282.00 2/20/98 215 DuPont 12864.25 12792.50 -$71.75 2/20/98 270 Int'l Pape 12876.75 11441.25 -$1435.50 8/24/95 130 KLA-Tencor 5812.49 2957.50 -$2854.99 8/13/96 250 3Com Corp. 11715.99 6859.38 -$4856.62 6/26/97 325 Innovex 9005.62 3656.25 -$5349.37 7/2/98 235 Starbucks 13138.63 7505.31 -$5633.31 1/8/98 425 3Dfx 10908.63 4595.31 -$6313.31 CASH $12005.75 TOTAL $204978.13

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