CNBC- STREET SIGNS
BEAR STEARNS SENIOR MANAGING DIRECTOR ANDREW NEFF ON THE MARKET
FEBRUARY 12, 2001
SUMMARY: Neff discusses the company's PDA survey. He reports on Palm (PALM). He comments on Handspring (HAND).
Ron: Sales of handheld devices exploded last year, totaling about one billion dollars worth of activity. But amid a slowing economy and a decrease in consumer spending, how has the industry fared since Christmas? Joining us now with the results of a proprietary dealer survey on handheld demand is Andrew Neff. He is senior managing director at Bear Stearns. Andy, people have been trying to figure out whether the slowdown in personal computers sales was simply the result of people pulling in their reins or if they were being displaced by these handheld devices. What did you find?
Well, we still have no answer on that aspect of it, relative to PCs, but one of our concerns was what's going on for the handheld market? We did a survey last week and we found that the demand is still very strong. We did a similar survey in December, we found in this survey 92% were on or better than planned, which was a very strong showing.
Ron: Now, can you give us the rate of growth, the important statistics that investors need to make some assumptions about how to the approach stocks.
Well, to use industry figures, the industry last year grew in the 70-80% range. This year, the numbers are in 40 to 60% range, we think it's probably going to be at the high end of that. The market's around ten million units in 2000, growing to we think 16-17 million. I think the relevant thing is if you look at the PC markets, around 160 million in 2001, and if you look at the cell phone market, it's around 500 million. So we think this is an enormous growth opportunity.
Ron: Now, does the growth opportunity come from new devices that will essentially merge the PC and the phone to such an extent that they will go beyond the types of devices we have already seen become popular?
Ron, I really think it's a new type of device. There are some devices that will be integrated devices, but really what people want is it's a new class of device that fits in the middle. And what you are going to have is you are going to have advances in terms of adding color, you're adding e-mail, you are going have continue to have advances, like the early days of the PC business, when you added color, sound, things like that. That will help to stir demand.
Ron: All right, so how are you playing the stocks? They have come down rather noticeably in the last several months. We have seen Palm for instance, after some initial enthusiasm, gets absolutely decimated. How do deal with that issue?
We have Palm rated as a buy. We have a way of looking at it. We break it up into a device company and a software company. Because they own the operating system, we have a 45-dollar price target on that. We have Handspring rated neutral. We think that it's a good company, but we think the stock is a little ahead of itself.
Ron: All right, now, a little ahead of itself, what does that mean for somebody who already owns it?
I don't know. We have a 35-dollar price target for that.
Ron: So it's a dollar above that.
That's 12 months out.
Ron: Yeah, so you would sell it then?
We just have it rated neutral because I think there is upside in the sector. I think the key is we would prefer to focus on Palm, given that they own the operating system, given they've got a licensing model which is, and that you have a lot of growth ahead of you. They are going to have expansion modules later this year, they're going have wireless e-mail, and I think the key is going after enterprise. That's the real key.
Ron: Let's shift gears for a minute. EMC is getting beaten up again today, as it has now for several days running. According to wire service reports and other folks, there are rumors going around that the company has missed its internal January targets, and maybe suggesting that it's not on track. What do you know about that? Are the rumors true? Do you have any idea? The stock has come down a lot since its all-time high.
I guess the way we look at it, we had downgraded EMC in December just because of the overall environment. I think that EMC is clearly a leader, but you have everyone else in the storage business missing numbers, so it makes you anxious. The company has a reduced head count. They have managed to execute in the past, but it's still a tough neighborhood to try to execute in. Whether they hit January or not, this is a company where the quarters are always back-end loaded. I wouldn't draw any conclusions based on January.
Ron: All right, what would you do with the stock?
We have the stock rated attractive. I think that it's a compelling longer-term story, because storage is the place to be. This is a company that knows how to execute, but you've got a bumpy road ahead of you just because of the economic winds against it.
Ron: Real quick though, with respect to the notion that the company was supposed to be immune to capital spending, Michael Rutgerds was saying that they would never get caught up in a technology downdraft because the demand for storage just kept doubling. Does Wall Street see it differently?
I think the thing is if you look at EMC, they have a track record, they went through Asian crisis and came through okay, they went through the Y2K crisis okay. I think they've got the best odds. It's still a tough market out there, but they are focused on gaining share. They're not in a defense mode. They are in an offense mode. I think they are well positioned, but it's a tough market for capital spending related projects no matter what.
Ron: All right, Andy good to see you. Thanks for being with us today.
Thanks very much, Ron.
Ron: Andrew Neff, senior managing director at Bear Stearns, joining us from his firm in New York.
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