Welcome to the PDA price wars
redherring.com
Welcome to the PDA price wars
May 16
There's nothing uglier than a family feud. Pitting foes that intimately know their opponents' strengths and weaknesses against each other can have disastrous results. And no two companies are more closely related than Palm (Nasdaq: PALM) and its progeny, Handspring (Nasdaq: HAND), which are currently locked in a price war that is likely to have bloody consequences.
But it's not as though we didn't see this coming. After Handspring cofounders Donna Dubinsky and Jeff Hawkins split from 3Com (Nasdaq: COMS) to start up the Palm competitor, it was only a matter of time before the whole experiment devolved into the cutthroat commodity business it is today. In the last two weeks, both companies have hacked away at their prices, opening the door to a full-scale price war that has investors running for the exits.
After Handspring chopped the price of its Visor Deluxe by 30 percent to $199, Palm immediately countered by halving the price of its $399 Palm VII to $199, and offering a $100 rebate. And the floodgates were opened. Reconfirming that no one wins in a price war but the consumer, Handspring's stock has plummeted 40 percent over the past week as news of the price cuts and a lowered price target from Lehman Brothers took their toll. Palm, already down 87 percent from its 52-week high, lost an additional 14 percent during the same time frame. And the bloodshed is only beginning.
IN WAR, IT'S LOSERS AND BIGGER LOSERS
While it's true that the economic downturn is severely crimping handheld sales, Palm hasn't exactly managed the rough times well. The company was caught ordering extra parts at the same time end markets were drying up, leaving them with months of inventory and leading to the dramatic price cuts of this week. As a result, Prudential initiated coverage of the stock Tuesday with the dreaded Hold rating.
"They basically turned left when they should have turned right," says Mark Specker, an analyst at Wit SoundView. "They've damaged their stock as a currency and their balance sheet by overstocking inventory. It was poorly handled."
Things have gone from bad to worse for Palm this year, which on March 27 warned that it would lose 8 cents a share in its fiscal fourth quarter, versus expectations of a 3-cent gain. Now with the price cuts and disappearing margins, the stock is trading at $6.86, just off its all-time low of $5.75.
On the other hand, Handspring has managed well through the slowdown, with little to show for it. The company's inventory difficulty hasn't been as severe as Palm's, and Handspring even managed to meet Wall Street's expectations of a 6-cents-per-share loss for its fiscal third quarter back in March. Most recently, and perhaps ironically, the company on Tuesday announced a deal with Palm rival Microsoft (Nasdaq: MSFT) to make MSN Mobile the default site on Handspring devices.
Mr. Specker says he gives Handspring's management high marks for handling a difficult situation well, but the company will still have to deal with difficult June and September quarters in which their revenue growth is expected to drop further. Ms. Dubinsky has told analysts that revenue for the fiscal fourth quarter will be about $130 million, up just 5 percent from the previous quarter. And Handspring is expected to lose 7 cents a share in the quarter.
INNOVATE OR DIE
It's hard to say what made investors think that the handheld industry wouldn't go the way of the PC industry, with price competition squeezing margins to microscopic levels. It's not too late for these companies to avoid the fate of the PC makers though, but it's likely to take some time before they can emerge from the current crippling price wars.
As it stands, both companies are selling glorified day-timers at ever-decreasing prices. That trend won't change until the manufacturers can manage to cram new functionality into the devices to justify higher prices. "They need to make a move to build wireless connectivity in as a core part rather than as an add-on," says Mr. Specker. "It would add substantive functionality and allow them to move price points back up, because right now these guys are selling electronic Filofaxes."
But the move isn't likely to occur until the middle of next year, and by that time it's hard to say how much damage the price war will do to both companies' stocks. At $6.68 a share, Handspring's stock is now trading at 228 times 2001 earnings, and it's expected to lose money in 2002. The company isn't expected to make money until a year from now.
These are hardware stocks, people. It's hard to justify why Palm and Handspring should trade at such a huge premium to personal computer companies. Compaq Computer (NYSE: CPQ), for example, is trading at just 28 times 2001 earnings estimates -- and incidentally, it is eating into both Palm's and Handspring's market share with its red-hot iPaq. So don't be fooled into thinking that the stocks of Palm and Handspring are now cheap just because they've fallen so hard. Given the tough competition in the handheld arena, it looks like the price of Palm's and Handspring's stocks may continue to head in the same direction as the price of their products. |
