ATI Technologies Pins Its Hopes on HDTV, Consumer Electronics

ATI's stock has been in a slump recently, but things are starting to look up with the launch of a new chip for set-top boxes.
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VANCOUVER -- Once a darling in Canadian stock-market circles, graphics-chipmaker

ATI Technologies

(ATYT)

has fallen on hard times in recent months, thanks to a combination of tough competition and tougher luck.

The Toronto-based supplier of 3D graphics and multimedia technology had reached a peak in its core product area, analysts say, when the company suffered a supply shock after the Taiwanese quake in September. Since then, shares have underperformed the

Nasdaq Composite Index

by 12 percentage points.

That combination might tempt some investors to shed the stock. After all, there are plenty of Nasdaq issues that are bounding to new record highs on a daily basis. But rather than trying to hammer at the same nail -- desktop computer chips, in ATI's case -- the company is shifting its focus.

On Monday, ATI announced it was planning a new chip, the Rage HDTV, which it says will be an affordable feature in future set-top boxes that could help bolster growth of the entire high-definition television industry. The company also announced it is working with

Microsoft

(MSFT) - Get Report

on a complete digital television system for the PC market, which is expected to be unveiled at the

Western Cable Show

in Los Angeles later this month.

The news sparked a rally in ATI, which jumped 14% to 14 7/8, a four-month high. (It is still off its 52-week high of 18 1/2.)

Part of ATI's past problems are tied to changes in the PC market. Desktop machines, which have traditionally been a strong point for ATI, have been hit by industrywide price competition, which in turn puts a squeeze on the graphics cards themselves. Some analysts suspect that buyers -- such as corporations on the prowl for glorified word-processing machines -- may be shying away from computers that come equipped with such high-end components.

For graphics-cards makers, much of the new action revolves around the dynamic notebook computer industry, as well as other portable computing devices. While ATI lays claim to over a third of the desktop business, its notebook market share is much smaller, estimated at about 17%. It's an area where competitors like

Nvidia

(NVDA) - Get Report

and

S3

(SIII)

have made significant inroads.

While fourth-quarter sales this past fall looked good on the surface, analysts worry they may represent the top of the company's core market penetration. Sales were $304.7 million, an increase of almost 50% from $204.7 million for the same period last year. But excitement over the news was damped by reports of increased costs from the development and launch of new products and a production cost pinch from rising silicon prices.

Montreal-based analyst Pierre Boucher of

CT Securities

, who maintains a hold rating on the stock, believes the company's challenges will linger for at least the short term. "They've reached a certain point where it begins to be difficult to gain market share," says Boucher, pointing to shrinking room for growth in an increasingly crowded market. He believes the company will max out at about 40% of the desktop market by year-end. "Competition may have slowed down their progression." CT has no underwriting relationship with ATI.

But the analyst believes ATI is headed in the right direction, pointing to the company's aggressive ventures into the set-top box market and the consumer electronic appliance market.

He could be right. Judging by the company's recent activity, its strong share of the market isn't about to crumble anytime soon. Last week alone, ATI has cut deals to power products by

Sharp

,

Compaq

(CPQ)

,

Dell

(DELL) - Get Report

and

Apple

(AAPL) - Get Report

. Ultimately, the year's woes look to be giving way to a bolder, more resilient company.

Fittingly enough, one of ATI's symbolic lowlights in 1999 was September's earthquake in Taiwan. Following the disaster, two of the company's Taiwanese manufacturing plants were inoperative for two weeks, leading to inventory shortages on both its shipping and receiving docks.

That problem has been resolved. (But it's interesting to note that before the disaster, ATI investors once associated the word "quake" with a namesake video game phenomenon that was stoking up the demand for graphics accelerators. Nowadays, the same word is sooner to conjure up images of tremors and volatility -- relating to the situation in Taipei, the company's stock, and even the state of the hypercompetitive graphics-cards business.)

As the year comes to a close, ATI Technologies can't afford to dwell on the good old days. Though circumstances may have forced ATI's hand, the company is set to embark on a new path -- one that, over time, may reward the patient investor.

Derek Moscato is a freelance financial journalist in Vancouver. At the time of publication he had no positions in any of the securities mentioned, although holdings can change at any time.