ATI Technologies Inc. stock shot up as much as 10 per cent early Thursday after the company announced it will develop graphic technologies for Microsoft Corp.'s future Xbox game console, taking key business away from rival Nvidia Corp.
No financial details surrounding the previously-rumoured deal were disclosed.
Shortly after the start of trading, ATI shares jumped more than 10 per cent higher in Toronto to a 52-week high. At 1:42 p.m. EDT, they were up $1.25 or 7.4 per cent at $18.17. On the Nasdaq, they rose 81 cents (U.S.) or 6.6 per cent to $13.06 at last check.
Nvidia, which is Microsoft's current Xbox graphics chip supplier, saw its shares slide 67 cents or almost 4 per cent to $16.11 on the Nasdaq shortly before 2 p.m. Analysts estimate the Xbox console accounted for 19 per cent of Nvidia's most recent quarter of sales.
"This decision marks a major victory for ATI, having beaten out the incumbent Xbox graphics chips provider and archrival Nvidia," Paul Howbold, an analyst at Desjardins Securities Inc., wrote in a report.
Although Xbox will probably not be sold until the end of 2005, Mr. Howbold said, he raised his Nasdaq stock target price by $1.50 to between $14.50 and $20 from between $13 to $18.
Markham, Ont.-based ATI already supplies graphics chips for Nintendo Co.'s GameCube, an Xbox competitor.
"We selected ATI after reviewing the top graphics technologies in development and determining that ATI's technical vision fits perfectly with the future direction of Xbox," Robbie Bach, senior vice-president of Microsoft's home and entertainment division, said.
In June, a report said ATI would supplant Nvidia as the graphics chip supplier for the Xbox 2 console.
The Register, a British-based Web site, cited the difficult relationship between Microsoft and Nvidia as one reason for the rumoured switch. The two companies entered arbitration last year to settle a pricing dispute.
"Microsoft shares our passion for cutting-edge innovation," K.Y. Ho, ATI chairman and chief executive officer, said in a statement.
"Our success working with Microsoft in the past gives us great confidence as we move forward, and our broad experience and wealth of engineering resources will ensure that we deliver. This agreement cements ATI's position as the prime graphics supplier for the future of the games industry."
Brian Piccioni, semiconductor analyst at BMO Nesbitt Burns Inc., said Thursday that what is significant -- and undoubtedly positive -- is that it appears ATI will be paid for the development and will receive royalties linked to the technology.
"That is, in effect, an arrangement with no downside for ATI, unlike Nvidia's relationship with Microsoft whereby it was essentially selling chips in the normal model and, by our estimates, not likely to have much actual earnings from the project," Mr. Piccioni said.
In a research report issued earlier this week on Tuesday, First Associates Investment Inc.'s Dennis dos Santos said it has raised its price targets for the company as "evidence mounts evidence that ATI has overtaken Nvidia Corp. for industry leadership."
Mr. dos Santos said First Associates has a "buy" rating on the stock. He raised his price target from $16 (Canadian) to $19.50 for ATI's shares in Toronto.
"We believe that once investors become convinced that the leadership of the industry has changed hands, ATI will be accorded the 'industry leader's' premium multiple."
He also noted that as the next generation of gaming consoles are due for 2005 or 2006, major awards would come this year.
"A win with Microsoft would add between $0.10 and $0.20 per share to EPS, beginning in fiscal 2005," Mr. dos Santos wrote.
Analysts agreed that Thursday's news was a blow to Nvidia, whose stock has been sliding for two weeks after the company said manufacturing problems with a new chip would leave second-quarter sales at the low end of guidance.
The Santa Clara, Calif.-based company again lowered its forecast when it reported higher second quarter profit last Thursday, saying sales will rise between 5 and 6 per cent. Wall Street analysts expected more.
Nvidia also said its gross margins would be flat to slightly down in the third quarter as it continued to work on cost savings. Nvidia stock tumbled $3.80 or 20 percent to $15.50 in the wake of the news.The stock is off about 40 per cent since its recent peak in early June.
Brian Alger, an analyst with Pacific Growth Equities Inc., said Thursday the deal between ATI and Microsoft is a negative turn of events for Nvidia.
"The current generation of Xbox contributed $445-million to Nvidia's top line in 2003 (its highest year) and in 2004 and 2005 we believe it would contribute $292-million and $200-million, respectively."
However, Mr. Alger said, the risk that Nvidia will not win the next generation of Xbox deal is already reflected in its share price.
© The Globe and Mail
Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.
Discover a wealth of investment information and and exclusive features.
