Is S3 About to Give Graphics Chip Kingpin ATI a Run for Its Money?

Also, more on Network Associates, Lernout & Hauspie, Axent and others.
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How many times does this column have to warn that today's chip star is tomorrow's chipped investment?

Obviously not enough. From the looks of

ATI Technologies'


stock, investors have no fear. And for good reason: For more than a year, ATI has been the king of graphics chips used in mass-market PCs. Much of its success came at the expense of a then-hobbled



, which learned about chip cycles the hard way. (Take a look at its earnings and a long-term stock chart if you want a new definition of the term "free fall.")

But S3 is doing what few chip companies ever do; it's looking a lot like the comeback kid, in large part (it claims) by doing to ATI what ATI did to S3. S3 already claims its


chip has been designed as the chip of choice in the next crop of PCs by three of the top five PC makers. (It wouldn't say which ones.) And it says it's working hard to get the other two. Just this week S3 CEO Ken Potashner told analysts in New York that so far S3 hasn't lost a design win to anybody.

What's more, the very mid- to low-end PC market that ATI once had to itself is getting additional competition from the likes of


(NVDA) - Get Report

, which specializes in building chips for high-end PCs.


(INTC) - Get Report

is expected at some point to roll out a chipset for super cheap computers, until now a prime market for ATI.

How could ATI lose so much? "They had already won the war," says


analyst Dan Scovel. "Now they're trying to expand into other areas, so they neglected their core PC base. We saw

Cirrus Logic

(CRUS) - Get Report

do it. We saw S3 do it. Now we're seeing ATI do it."

But ATI denies that it's losing anything significant to S3. While conceding that S3 has some design wins, an ATI spokeswoman adds that ATI's market share continues to grow by expanding to such areas as notebooks and set-top boxes. "They will get one or two big names, but they won't get volume," she says.

To which an S3 spokeswoman says, "We absolutely have won high volume, and we're winning these designs from ATI."

They both can't be right. Don't ya just love it?

Honeypot accounting, update:

Honeypot accounting, which is how this column has characterized accounting at

Network Associates


, apparently is taking its toll. Yesterday, after the market closed, the maker of security software said it had resolved longstanding accounting issues with the SEC but also warned that its first-quarter profits would miss analyst estimates. The

news came after

Morgan Stanley

yesterday sliced its 1999 estimate by 18% and downgraded the stock to a neutral. The stock, one of Silicon Valley's former highfliers, tumbled 7 1/2, or 25%, to 21 15/16; earlier this year it traded as high as 67 5/8.


Lernout & Hauspie's


stock rose 5 11/16, or 15%, to 39 9/16 after the company reported that Intel plans to invest $30 million in the maker of voice-recognition software. Never mind that Lernout faces the same SEC restatements as Network Associates and other companies whose stocks have been shredded. Never mind that analysts have slashed its earnings estimates in anticipation of SEC-mandated restatements. Never mind that Lernout & Hauspie, once again, has delayed the report of its earnings.

The latest delay, on Monday, was a doozy because the company had scheduled a conference call with the purpose of announcing earnings. Instead, it announced the Intel deal -- strange, because Intel hasn't actually made the investment, and won't until it has completed due diligence.

So, why did Lernout announce it? A spokeswoman didn't return my call. However, according to an Intel spokesman, Lernout said it had to make the pending investment public because the two companies have a "binding" agreement, and therefore "they said it was material." Short-sellers, meanwhile, think the announcement was a way to divert attention from yet another earnings delay.

Lernout told analysts the latest earnings delay was the result of accounting issues with


, in which it has a minority investment. In a report to clients,

H.C. Wainwright

analyst John Money wrote, "Financial columnists that have previously sniped at the company will undoubtedly point out that management has had enough forewarning to get the Omnivoice numbers." Come to think of it...

But seriously, folks, based on Money's estimates, Lernout trades at more than 80 times expected earnings. To which one longtime Lernout short says, "This is nuts."

Kudos to:


analyst Nicole Schmidt, who (as this column recently

pointed out) warned not long ago that a "budget freeze" is likely to occur on security software spending, and that the industry will be poised to take off 12 months after full Y2K remediation has taken place." (Her comments were part of a warning on

Axent Technologies


, which was around 31 at the time; yesterday it closed at 8 3/4. Much of the slide occurred after the company itself warned of a slowdown, in part due to a -- drumroll, please --Y2K spending slowdown.)

At the time the column questioned whether

ISS Group


warranted such a premium over Axent. ISS has since fallen, but at 69 3/4 it still remains virtually untouched by Y2K and other spending issues -- the very issues that have (in addition to accounting matters) felled Network Associates and the entire enterprise software industry. "Companies are not quite as loose with the money as they had been historically," Schmidt says. "It was 'need to have' software, not 'nice to have.' " Until spending patterns change, it's now the other way around.

Herb Greenberg writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at Greenberg writes a monthly column for Fortune and provides commentary for CNBC.