In the graphics chip business, appearance is everything.

Whether it's time to buy, sell, hold or avoid the sector's two leading companies,

Nvidia

(NVDA) - Get Report

and

ATI Technologies

(ATYT)

, depends largely on what investors see when they look at them.

Some investors see two fast-growing, profitable entities poised to take advantage of new opportunities beyond the PC market. Nvidia, for instance, could see a boon from its deal with

Sony

(SNE) - Get Report

to develop a graphics chip for Sony's next-generation video-game console, noted one fund manager who asked not to be named.

"If you look at Wall Street's

earnings expectations, they're probably light for the company," said the fund manager, whose firm is long Nvidia but has no position in ATI. "We like the stock a lot."

But for other investors, the graphics chip market blurs into the graying PC business, meaning the two stocks don't deserve more than a passing glance. Both companies still heavily depend upon PC-related sales, noted Cody Willard, a fund manager and contributor to

TheStreet.com's

sister site

RealMoney.com

.

"There's a lot of stocks out there that I love, but

Nvidia isn't one of them," said Willard, who has no position in ATI but is net neutral on Nvidia, being short the stock and long on calls.

Meanwhile, the broader market has seemed to go back and forth between the two extremes, intermittently loving and hating the two stocks. Depending on which viewpoint wins out, these names could make a profitable play within the technology sector in coming quarters.

Both Nvidia and ATI design and provide chips for PCs and other devices that help those machines display photographs, video and the graphics used in games. Demand for the distinct graphics chips they offer has grown with the increasing popularity of digital photography and video, which can often require intensive processing power.

Each company is also trying to branch out from the PC market. Nvidia, for instance, provides graphics chips for

Microsoft's

(MSFT) - Get Report

Xbox, and it has signed deals with

Motorola

(MOT)

,

Samsung

and

LG

to provide graphics chips for those companies' mobile phones. ATI has a similar deal with

Qualcomm

(QCOM) - Get Report

and will provide the graphics chips for the next-generation game consoles that Microsoft and Nintendo are expected to introduce by next year.

These emerging markets could prove important to both companies. In the first six months of this year, ATI's revenue outside the PC market grew 81% to $153.9 million, while its operating income for the segment improved to a $20.6 million profit, from a $3 million loss in the same period a year earlier. Nvidia's revenue for its mobile-phone chips grew to nearly $46 million in its just-completed fiscal 2005, from $9 million in fiscal 2004.

Outside the PC business is "where the big growth markets are" and where the companies are poised to "steal market share," said Jon Peddie, who analyzes the graphics chip market as the head of his own research firm. "I think all roads point up for these guys."

But profitability and postings of substantial growth at both companies have rendered the stocks attractive to bulls.

In its most recent fiscal year, ATI's earnings skyrocketed, and its sales jumped 44% to nearly $2 billion. Nvidia's pace last year was slower but still solid, with 33% growth in earnings per share on a 10% jump in sales.

Analysts think the strong results will continue. Wall Street has projected that Nvidia will post EPS growth topping 100% this year, while analysts expect ATI to show EPS growth of 28%, according to Thomson First Call.

Despite the fast-paced growth, both companies have arguably reasonable valuations. ATI, for instance, is trading at 19 times its earnings over the last four quarters and just 16 times its projected earnings for its current year. If you look at past results, Nvidia is a bit pricier, valued at nearly 42 times its trailing 12-month earnings. But viewed on a going-forward basis, Nvidia is trading at about 20 times its current-year expectations.

"We think

Nvidia is a cheap stock," said the anonymous fund manager. "We think the stock should be closer to $35 than $25."

Nvidia closed the regular session on Tuesday at $23.53, off 23 cents, or 1%; ATI ended the day up 3 cents, or 0.2%, to $17.32.

The companies' ties to the PC industry could also prove to be a blessing. PC sales grew about 15% last year, and Peddie estimates they will grow at about a 9% clip this year. But both companies are likely to grow faster than the market, he said.

But it's precisely the companies' dependence on the PC market that bears point to when explaining why they avoid the stocks. Nearly 76% of Nvidia's revenue in its most recent fiscal year came from sales of chips and chipsets for PCs. ATI was even more dependent on the PC business, with some 87% of its sales tied to that market.

"If the PC business does well, it's more than likely they'll do well. If the PC business slows, then they end up missing," said Jay Somaney, a portfolio manager with TSG Capital Group, who does not have a position in either stock.

The problem is that after a miniboom last year, the PC business is expected to slow this year -- and few expect it to return to the fast-paced growth seen in the 1990s or earlier. In the meantime, PC prices have fallen dramatically in recent years, forcing manufacturers to look for cost savings.

"If you look at PC and desktop prices right now, they're very, very cheap," said Somaney. "These guys are getting constantly squeezed by the boxmakers."

While both ATI and Nvidia are exploring other markets, they may not help boost overall sales anytime soon, because they're currently too small, some investors note.

"Nvidia and ATI are so tied into that PC market that it's going to take a huge amount of secular growth in another market to help them diversify," said Willard.

Adding to the skepticism is that both companies have disappointed investors in the recent past. Earlier this month, ATI predicted that revenue in its current quarter would

fall short of the Street's expectations. And last August, Nvidia posted revenue and earnings that dramatically

missed analysts' estimates.

Though both stocks could make interesting plays, "you don't know when you're going to get blindsided," said Spiegel, a fund manager with Dalek Capital who follows both Nvidia and ATI but has no position in either stock.