SMARTMONEY.COM: 3Com Thinks Palm's The Bomb
Dow Jones News Service ~ August 3, 2000 ~ 8:00 pm EST
By Cintra Scott
NEW YORK (Dow Jones)--Last week, Palm (PALM) and 3Com (COMS) officially split up. Gone are the arbitrage opportunities that had made the two stocks as interdependent as Chang and Eng for almost five months.
But what's 3Com without Palm? That's a tough question, considering 3Com's massive transformation and its many moving parts. At its core, the 21-year-old 3Com has three large but slowing businesses: It makes adapter cards, LAN switches and remote-access products for network service providers such as AOL ( AOL) and Sprint PCS (PCS).
But in its post-Palm life, 3Com is still chasing Palm-like growth. To that end, it's focusing on its fledgling consumer businesses in Internet appliances and connectivity products.
To spread the new growth story about ol' 3Com, the company's honchos briefed Wall Street analysts on Thursday. And the Street responded favorably, sending the stock up 17%, to $16.94.
So what is 3Com saying about itself to turn investors on? Well, according to spokesman Brian Johnson, the new 3Com is now ready to roll at Internet speed. " We're not a stodgy old 21-year old; we think we move like a start-up" he says. And thanks to Palm's runaway success in hand-held computing, the 3Com brand name still carries some weight. In fact, the company is planning to cash in on its Palm association by offering more products featuring something 3Com calls " radical simplicity."
"[3Com] learned this from Palm," says Johnson. "It's what Palm describes as the 'Zen of Palm': the ability to click on an icon of a calendar to get into your date book...." In other words, simplicity. 3Com plans to make use of this novel concept in designing all its consumer and small-business products.
For example, one point of pride is 3Com's Internet radio. It looks like a regular old radio and "tunes" like one, too. This Internet appliance, developed by Kerbango (a recent 3Com acquisition), plays online audio programs that know no geographic boundaries. (At last, Russian-radio soap operas can be heard in Kalamazoo!) With a new Internet device for the kitchen counter on the way ( download recipes and check your stocks!), 3Com is hoping to develop its reputation for products that are as simple to use as they are technically advanced.
And while 3Com is out of the old analog-modem business, it's still selling broadband modems. DSL and cable modems are the focus now. In fact, the company says it controls about 90% of the broadband-connections market (for both DSL and cable lines), but that's still a tiny place to be. "We're just waiting until [ these broadband connections] catch fire," says Johnson. "And we know they will."
Analysts generally like what they hear about the new growth strategy, but follow-through is a big question mark. 3Com's mixed track record makes its ambitious plans especially risky. And that's the main reason analyst Christopher Stix just initiated coverage of 3Com with a Neutral rating. (Stix was transferring his coverage of the stock from his old firm, SG Cowen, to his new firm, Morgan Stanley Dean Witter.) "3Com has missed or guided down expectations virtually every other quarter for the last several years," Styx explained. "The risk of a miss due to unexpected market conditions is fairly high in some future quarter."
While Stix doesn't have an official price target for 3Com shares, he wrote last week that a "sum-of-the-parts" valuation brings their worth to $34 a piece. That's more than double their trading value even after Thursday's run-up. But Stix thinks a more realistic valuation is more like $25 a share - using an " unusually large 25% discount."
Meanwhile, what's Palm without parent 3Com? Pretty much the same as it's been since its IPO. And although Palm's post-IPO valuation has moved steadily downhill, that seems to have more to do with waning tech exuberance than the company's fundamentals. Remember, Palm went public around the height of the Nasdaq's frothiness.
Really, there's little new news, unless you count this item: A special " Claudia Schiffer" Palm, colored powder blue, will be available in September, the company said Tuesday. This is the first personal digital assistant named after a supermodel.
Besides working on such ground-breaking new products, Palm has been busy sharing its optimistic post-spinoff outlook with institutional investors and analysts. The wireless computing industry is growing faster than previously anticipated. And Palm's biggest problem lately is that demand has outstripped its components supply.
3Com hopes to be so lucky some day. While it's waiting for its turn to grow like a weed, 3Com has announced that it may use some of its considerable cash supply to buy back up to $1 billion worth of stock. That's good news for shareholders. But perhaps launching a Cindy Crawford modem card would prove more in keeping with its Palm-like plans.
For more information and analysis of companies and mutual funds, visit SmartMoney.com at smartmoney.com
(END) DOW JONES NEWS 08-03-00 |
