Can 3Dfx Beat the Graphics Chip Odds?

MonDayne:

Graphics, schmaphics: Push is about to come to shove for 3Dfx (TDFX), whose third-quarter earnings recently took an unexpected tumble. The company thinks it will climb back with a series of important design wins from PC makers, but doing so from a profits standpoint would mean beating the odds.

The graphics chip industry is littered with former highfliers like Tseng Labs (TSNG), Cirrus Logic (CRUS), S3 (SIII) and 3DLabs (TDDDF). Just look at the chart of each one, and you can almost tell which was the leader at what point in time. "Every one of these stocks that goes above 15 or 20 is a short," says money manager Gary Gratny of Whelan Gratny in San Jose. "They're an intellectual waste of time for me. You don't know when to buy them and generally don't know when to sell them."

The reason, according to one money manager who goes long and short these stocks: "It's this big inevitability: You have it for a while, and then you lose it. And when you lose it, Wall Street trades you to low valuations."

The "losing it" of which this money manger speaks occurs when leapfrogging technology makes one company's chip more desirable than the others, which usually results in price wars and thinning profit margins. "The problem with the whole graphics area is that it's very tough to make it beyond one cycle, and so far nobody's done it," says NationsBanc Montgomery Securities analyst John Joseph.

Which brings us back to 3Dfx. CEO Greg Ballard insists his company's dismal third quarter "is not a symptom of our industry as much as a horrible miscommunication" between Diamond Multimedia (DIMD) (his customer) and 3Dfx regarding demand. Ballard says 3Dfx is now doing its own checks of the distribution channel, and says the company isn't just focused on technology, like its competitors, but developing its brand name. Its chips are sold under the Voodoo and Banshee brands.

Just one problem: The PC industry is demanding lower prices, and Canada's ATI Technologies (ATY:Toronto) and even Intel (INTC) have been aggressive on that front. Ballard insists PC makers will turn to his brands to give them something different. He adds that technology leapfrogging occurred during the transition from 2D to 3D chips, and there's nothing new to leapfrog 3D.

Maybe not, but in an industry that is a wasteland of a business, even new design wins may not help generate interest on Wall Street.

Right now ATI is considered the leader, "but it's like a nice house in a bad neighborhood," one money manager says. "And, oh yes, Neomagic (NMGC), whose graphics chips are used in laptops, is doing well and the same fate is awaiting them."

And as usual, most investors won't know what hit them.

No Monopoly?: Last time this column mentioned WMS Industries (WMS) it was because its new Monopoly slot machine, which involves a game within a game, may be the hottest new game ever in Las Vegas. Unlike most slots, which are sold directly to the casinos, this slot lets the company share in the profits with the casinos. "I've never seen that number of people waiting to play a slot machine," says David Ehlers, chairman of Las Vegas Investment Advisors and a big WMS bull.

Enter Anchor Gaming (SLOT) and International Game Technology (IGT), which jointly created Wheel of Gold and Wheel of Fortune, previously the two most successful game-within-a-game slots. With Monopoly so successful, they may very well want a piece of the action. Last week Anchor and IGT issued a joint press release that said, simply, that Anchor had been awarded a patent that "covers any number of gaming devices and methods for playing wagering games that include a bonus payout indicator." No specific company was named. Anchor CEO Michael Rumbolz insists he was "sending a message to everyone in the gaming industry that the game-within-a-game concept that we introduced with the Wheel of Gold is a patented concept. Anybody who created a machine like that could be infringing on that patent."

He says attorneys for IGT and Anchor have been reviewing their options and will decide what to do over the next few weeks.

Ehlers says these issues are usually resolved out of court, with the infringer paying a 10% royalty. Considering the success of Monopoly, he doesn't think WMS would be hurt that badly if it turns out it did indeed infringe and does have to pay. "If they lose 10% it will not be the end of the company," he says. WMS officials didn't return calls.

Reader revolt: Someone named Steve, in an email, noted I had panned Gillette's (G) Mach3 on TheStreet.com and on TV, and how on CNBC I told that I had tried the Mach3 and "with a flourish" described how I had "thrown it away after one use."

"Then, surprise, he was asked a few days ago on CNBC what he had shaved with that morning. He sheepishly said he used the Mach3!!! To my knowledge, however, Herb has never explained why he's back to using Gs new razor. Does it matter? Well, frankly it now look as though Herb is a storyteller who got carried away with his story, exaggerated it a bit and had sneakily gone back to Mach3 but isn't willing to modify anything about his previous story (unlike Cramer, who admitted he was wrong with his call on the market.)"

Steve, I tossed my first Mach3 after three weeks, when it became clear the two free razors that came with it had stopped doing their job. I then bought a new one to use as a prop for the CNBC gig. After that, I decided to give the razor one more try. After the two free razors were gone I bought a new four-pack for $6.50 ($6.50!!!). That was a few weeks ago. I have since used the Mach3, alternating with my Sensor Excel. The reason I haven't written more is because the jury is still out. I like the feel of the Mach3 for the first shave or two. It's smoother and does, indeed, give a closer shave.

However, after that it starts dragging, and to get a great shave -- especially under the nose and under the face -- I have found I need to reshave immediately with the Sensor Excel. For me, at least, Mach3's blades simply don't do a good job on my entire beard after four shaves or so, which makes the Mach3, in my book, a bad buy.

Will I continue with it? This week I plan to shave one half of my face with one razor, one half with the other. I'll pass along the results.

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