S3's inexplicable spike

S3 shares jumped 21 percent yesterday on an announcement that its graphic chips will be used in Compaq's new Armada 7400 series computers. But was the spike an overreaction by investors?

Analysts say it might have been.

"It was not a tremendously significant event," Robert Fagin, an analyst with CIBC Oppenheimer said, noting that although S3's shares soared based on a percentage increase, the actual amount of money involved was not that great.

Shares of S3 continued to climb in early trading today before retreating to a flat performance by the afternoon. Yesterday the stock closed at 4.5938, up slightly more than 81 cents.

"This announcement was not a huge shift in their business model or outlook," Fagin said. "I don't know why investors reacted this way."

Indeed. Last April 16, S3 announced that the same ViRGE/MX accelerator chip touted in yesterday's announcement would be used in Compaq's Armada 7800 series of computers--a notebook in roughly the same performance category as the 7400 series of notebooks. In fact, several different S3 graphics chips are included in a number of Compaq notebooks. S3's stock rose 10.2 percent on that April day to close at 7.0625.

Paul Crossley, an S3 spokesman, said he knew of no other news driving S3's stock performance yesterday.

"This was the only announcement we had. Sometimes we put out a press release that we think is pretty important to the strategic direction of the company and the stock does nothing, and sometimes it reacts [to events that are less significant]." Crossley said.

Mark Grossman, an analyst with Cowen & Co., said S3's future depends on the success of its Savage 3D chip, which is designed to help the company recapture lost market share in the high-end graphics chip market.

S3 had dominated the 3D graphic accelerator market as late as 1996, but when it was late coming to the market with a new high-end accelerator chip due to delayed shipments, its competitor ATI took away market share and relegated S3 to the low-end graphics chips market, Grossman said.

Since then, the company has racked up a few design wins with motherboard makers for its Savage 3D, but it has yet to announce any deals with major computer manufacturers.

"If S3 wins some design wins for a bunch of different lines with Compaq and Dell, that would be significant," Grossman said.

That's what S3 is banking its hopes on, even though investors seem to be more interested in the company's Compaq ties.