Post of the Day
May 28, 1998
Subject: TDFX Thoughts
After reading the TDFX board quite regularly recently, I�ve decided to post the following:
As an economist, when I first started investing in stocks, I thought I had just to use the basics of supply and demand to understand their price movements. ( Due to the underlying fundamentals of the company of course ). This I will call the ECONOMIC FACTOR of investing. But actually I found out ( and this was very disappointing for me after so many years of study ) that there is one other, more important reason for stocks to move - price movements based on expectations.
|"In TDFX we have reached a point where the psychological factor outweighs the economic factors ( even though they are very positive ) by a wide margin and the expectations are negative."|
The depending factors here are fear and greed. This I will call the PSYCHOLOGIC FACTOR of investing. Now you will ask yourself what has all of this to do with TDFX ? This here is my answer to all of you trying to understand why the stock price of TDFX is declining.
In TDFX we have reached a point where the psychological factor outweighs the economic factors ( even though they are very positive ) by a wide margin and the expectations are negative. Fear takes overhand, because only a few people really understand the business of 3Dfx due to the complexity of the technology used - so negative expectations due to competition ( nvidia, S3, Matrox, Intel = always a threat as a competitor ) - are responsible for price movements - and used as an excuse to sell.
Here is the big difference to the internet stocks, as often asked on the board, the good expectations don�t change even if many internet companies have weak underlying numbers - their stocks keep climbing. The selling in TDFX triggers even further selling until the point where the traders are scared out of the market. What will happen next ?? The stock price will build a base. Bargain hunters will snoop up shares first and then expectations will change and momentum players will jump on board - probably very close to TDFX�s release date of their next quarters earnings - the majority will have good expectations, so greed will take overhand and the stock price will climb again significantly.
|"The majority in the investment world still sees 3Dfx as a niche player, with a single product that could go out of favor tomorrow due to a better product of a competitor. In such a high risk investment area, fear will be the dominating factor."|
IMHO the price will decline again afterwords, due to the factors described above. Why is this so ? The majority in the investment world still sees 3Dfx as a niche player, with a single product that could go out of favor tomorrow due to a better product of a competitor. In such a high risk investment area, fear will be the dominating factor. The major change in expectations will take place, when 3Dfx will enter the 2D/3D arena with Banshee....This will change the whole outlook for the company - from a niche player with 3D accelerators - to an huge player in the 3D arena - not only their outlook, also their bottom line, and of course their share price.
If they are successful, how high can their price go ? Lets asume earnings for 1999 of $ 2.50 for their Voodoo2 and probably Voodoo3 - can 3Dfx add $ 2.50 more due to their new Banshee product ? Let�s be pessimistic - only $ 1.50 = $ 4.00 of 1999 earnings. That will be with today�s PE of 13 a stock price of $ 52. ( Almost a triple from these levels ). Will their new product justify a higher PE level ? A PE of 20 would bring us a stock price of $ 80 ( almost a five-bagger as Peter Lynch would call it ).
You can turn the numbers as you like and do the math by yourself........So all of you scared people out there - you will find out throughout your investment years, that bad expectations in great companies create immense investment opportunities. All of you with paper losses out there, ask yourself - what were your expectations for 3Dfx as you bought their stock first ? Have these expectations changed or even got better ? If not - why don�t you buy more ( Fear ? )
The price for your company of choice has become cheaper......Do you think my scenario for 3Dfx is realistic ? If yes - put your dollars to work.....If not - you should probably sell immediately. Thank you for your patient reading, opinions welcome.
Freddy a Fool
( Just for Clarification - I am long TDFX with a price of $ 22 - bought long before Q1 earnings release )