Back to
Positions Watchlist News Pricing
Chart Total
Return Industry
Comparison Annual
Financial Quarterly
Financial
SMARTMONEY.COM: Reading Palm's Future
Dow Jones News Service ~ May 26, 2000 ~ 8:00 am EST
By Cintra Scott
(This report was originally published late Thursday.)
NEW YORK (Dow Jones)--Have you spent time with any Palm (PALM) devotees lately? They go on and on about th%ir favorite Palm downloads. They wield those little Palm pens like magic wands. They aim their precious Palms at each other to exchange phone numbers, city maps and pictures of friends. They trade stocks and check e-mail in line at the grocery store. Some get so attached that they mourn their Palms' passing at an online graveyard dedicated to broken devices. And so the Palm fan club grows and grows, not unlike a virus. After all, no advertising campaign works as well as peer pressure.
Purchasing a Palm means more than just acquiring the latest handheld personal digital assistant, or PDA, - it's become a lifestyle statement. The brand name is increasingly synonymous with wireless computing. In fact, the company controlled more than 78% of the ballooning PDA market in 1999, according to the International Data Corp. That's no small feat.
So why does Palm's stock chart look like a cliff dive? Bad timing may be the simple answer. The hyped initial public offering debuted in March, at the peak of the tech market's frothiness. Investors were wild for the offering, begging brokers for a stake at $38 a piece. Little did they know that the tech market would tumble weeks later. But while the Nasdaq is 36% off its March 10 intraday high of 5132, Palm has sunk 87% off its March 2 high of $165. The next question is: How low can it go?
On Friday, the stock hit a new all-time trading low of $24.31. On Monday, it sank even lower, hitting $22.38. On Tuesday, even lower: $22. On Wednesday - yup, you guessed it - a startling new low of $19.88. '$38 IPO now half-off! Memorial Day Sale,' read one message on Yahoo's boards. Even at bargain-basement prices, the amount of short interest on Palm is staggering: 17 million shares on May 15 - up from 12 million on April 15 - according to Thursday's Wall Street Journal.
The odd thing is, when a company corners more than three-quarters of a rapidly growing market, investors are generally willing to pay a premium for a piece of it. Palm's IPO pop may not have been unexpected - but what led to its downfall?
Well, let's talk first about price-to-earnings ratios. Even at its IPO price, Palm's P/E was more than 540. To compare, Cisco's (CSCO) P/E is just shy of 118, Intel's (INTC) is less than 48 and Microsoft's (MSFT) is less than 38. At the stock's peak, its P/E was a staggering 2,350.
Granted, many tech analysts pay no heed to P/E's whatsoever. Without a common valuation measurement, they often simply look at similar stocks' prices to come up with their valuations. And similar stocks' prices in March were one thing; in May, they were quite another.
But while popular sentiment has changed, the fundamentals remain the same. For instance, the PDA market is still expected to grow heartily - 40% per year for the next five years, according to IDC. And at least two hardware analysts call IDC's numbers conservative: They think the growth rate will be closer to 60% per year.
One of those analysts is Jonathan Ross of ABN Amro. He declared his rosy market outlook back on Palm's March 2 IPO day. Before the $38 stock even started trading, Ross smacked a six-month price target of $90 on the stock, predicting a quick 137% premium for investors.
'We believe that an opportunity valued at $155 billion awaits Palm and its peers,' Ross wrote. 'To justify our price target of $90, Palm would only need to command one-third of the addressable market, a goal we think is very realistic.' After Ross's six-month target was surpassed in a matter of hours, the analyst wrote: 'We will revisit our price target and rating after trading in the stock stabilizes - we eagerly await upside catalysts such as announcements of large enterprise deployments, strategic licensing agreements, content deals and continued platform innovation.'
So what does Ross have to say for himself now? Nothing. Colleague David Wu explains that Ross left the firm and coverage of Palm has been suspended until further notice. (In the meantime, San Francisco-based Ross has turned up as regional head of technology research for the Asian firm Indosuez W.I. Carr Securities.)
It's too bad for Palm Ross isn't around to justify that $90 exuberance. And as for Palm's stock-perking announcements, they've been almost as rare as Amro's Palm analysis lately.
Instead, the big news has come from a competitor in the Internet-enabled PDA market. On April 19, Microsoft launched its Pocket PC platform, heir to its unsuccessful CE series. So far the Pocket PC is picking up pretty good reviews and the company has made a spate of content deals for its handheld device. Still, tech-heads prefer the Palm's technology and the Pocket PC has to make up a lot of ground before it catches the market leader.
But perhaps the most significant news about Palm had nothing to do with products at all. On May 8, parent 3Com (COMS), which currently owns 94.3% of Palm, announced that it had officially been granted tax-free status by the Internal Revenue Service for its spinoff of Palm shares. (That means 3Com won't be taxed on its proceeds from separating its Palm business.) In addition, 3Com said the spin-off would take place July 27. 3Com shareholders of record as of that date will receive an estimated dividend of 1.5 shares of Palm for each share of 3Com they own.
As a result, millions more shares of Palm will be entering the supply stream - and that dilutes demand. Now, some say 3Com shareholders are likely to hold onto their Palm dividend, so all those shares won't suddenly land on the market. But at the very best, the spinoff event this summer will be a concern weighing on the minds of investors.
Adding to the palm sweating is a shortage of components for the gadgets. Jimmy Johnson of AG Edwards said this week that most stores he checked were flat out of Palms. 'The thing that really alarmed us was the magnitude of the shortages that were basically across all product lines,' he wrote in a report Tuesday. And while some are excited about Palm's operating-system licensing and wireless- Internet-access opportunities, a whopping 99% of its revenues still come from hardware sales.
'The shortage is old news,' counters Chris Sessing of Crowell Weedon in Los Angeles. Indeed, the company spoke openly about the need for more flash memory and liquid crystal displays, LCDs, back in March.
But don't get him wrong, Sessing is no Palm fan: he has a Hold rating on the stock. 'Look at the P/E,' he says. Indeed, even at the sunken $21.69 per share, the price-to-earnings ratio of 371 would make any value-fund manager faint. This fiscal quarter (which ends May 31 - next week), analysts expect the company to earn three cents a share, which would bring the annual total up to seven cents per share, according to First Call/Thomson Financial. That's not what you would call raking it in.
Aside from the four underwriters (which typically take it upon themselves to support a new stock vigilantly), four other firms follow Palm, according to First Call/Thomson Financial. Of those, two say don't buy, two say buy.
But where are the loyal Palm pushers out there? After all, a brand new stock can ordinarily count on its underwriters to faithfully support it while it remains vulnerable to the ebbs and flows of investor sentiment. And indeed, analysts at Goldman Sachs, Morgan Stanley Dean Witter, Merrill Lynch and Robertson Stephens all initiated coverage with Buy ratings back in March.
But if Palm was counting on ongoing support from these guys, the recent departures of Rick Schutte at Goldman and Dan Niles at Robbie Stephens must smart. Both firms have suspended coverage of the stock as a result. With the spinoff date looming and tech valuations contracting, Palm investors have been left in the lurch.
For more information and analysis of companies and mutual funds, visit SmartMoney.com at smartmoney.com
(END) DOW JONES NEWS 05-26-00
|
