Morningstar-->HAND:Best $40 bucks I ever spent paying a reporter to write a story. Looks like he even spent some time looking into the Truth instead of just slapping out a hypeful story like his contemporaries.
Note: The above statement is said with humor and good fun (It's Satire), much like the trading of HAND itself. Please don't spaz out on me. Hey what the heck its Friday, go ahead and Spaz.
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biz.yahoo.com
Friday October 27, 7:00 am Eastern Time
Morningstar.com
Give Handspring the Back of Your Palm
By Pat Dorsey
If you were ever in doubt as to whether the vaunted post-PC era has finally arrived (at least in the minds of Wall Street), take a quick peek at the performance of three handheld-device stocks--Research in Motion (Nasdaq: RIMM - news), Palm (Nasdaq: PALM - news), and Handspring (Nasdaq: HAND - news)--over the past three months. While the Nasdaq has sunk 20%, these three lovelies have jumped 85%, 52%, and 138%, respectively. That is some pretty impressive strength in a tech market that's seen bloated expectations get blown out of the water left and right.
So what gives? Have we really entered a new paradigm in which those clunky beige boxes underneath our desks will be completely replaced by sleek, functional gizmos like the BlackBerry pager, the Palm Vx, and the Handspring Visor? Should we be dumping our dull old Dell and loading up on some of these sexy new-economy faves?
Get real. The recent craze in these three companies bears all the signs of a classic bubble, just like last year's Linux lunacy and countless other hypefests before. These stocks are all trading on momentum and news, without a shred of attention being paid to valuations--which is generally a recipe for a painful stock-price correction sooner rather than later.
For the moment, let's focus on Handspring. Although Palm and Research in Motion are nuttily valued as well, they each have some promise of high-margin recurring revenue from licenses and subscriptions, so I'll give them the benefit of the doubt for now. Mind you, I wouldn't touch either stock with a 10-foot Palm stylus, but at least there's some (very) tiny semblance of rationality to the sky-high expectations that have been placed on both companies. (For the record, Palm trades at about 20 times annualized sales and Research in Motion at 45 times annualized sales. Yowza.)
Great Products Do Not Always Make Great Stocks
Now, before you click on that e-mail link and flame me, let's get a couple of things straight: I know the products are cool (I certainly love my Palm V, and I have colleagues who love their Visors), and I know consumers are buying them like crazy. Fine. But a great product or service does not make a great stock, as Amazon and Webvan fans have painfully found out.
For one thing, the more than doubling of Handspring's stock has ``bubble'' written all over it. After the company's initial public offering in late July, the stock went essentially nowhere until mid- September. Then, it promptly started moving a couple of points per day, sparked by some positive news articles and an announcement that the company would soon be introducing a mobile-phone plug-in for its flagship Visor product.
In fact, the latter piece of news drove the stock up about 12% in a day. That was nothing compared to a later announcement that CIBC World Markets was initiating coverage with a strong buy. That piece of non-news sent the stock up almost 17% in a single trading session. When stocks move that much on an essentially meaningless piece of information--did you really think that a sell-side analyst was going to initiate coverage with a hold?--you know that you're in bubble territory.
Forty Times Sales for This?
Bubble talk aside, Handspring's valuation of 40 times annualized sales is simply unsustainable. This is a company that did $70 million in sales last quarter, won't be profitable until late next year at the very earliest, but yet is currently valued at over $11 billion. Aside from simple infatuation, I have absolutely no idea why anyone would pay this much for this company.
For one thing, the PDA market is fiercely competitive, with Palm, Microsoft, Compaq, Sony and a host of other companies all scrabbling for market share. Yes, Handspring has gotten off to a very strong start--but when product cycles are measured in months, and early- adopting consumers have to have the Next Cool Thing, there is absolutely zero assurance that the company's momentum will continue. Maybe it will--but at 40 times sales, I want a lot more than ``maybe'' backing up my investment.
Even more importantly, Handspring's business model is inherently low- margin. Nobody makes much money on consumer electronics, after all. Printer manufacturers make money on cartridges, camera manufacturers on film, and even PC companies are finally figuring out that the big bucks are actually in service and support. (Look at Gateway's success in building this revenue stream, if you don't believe me.)
Unlike Palm, which should get very high-margin licensing fees from its ownership of the Palm operating system, or even Research in Motion, which receives subscription revenues from its e-mail service, Handspring only makes money by selling gizmos. That's it. The company will have to try to squeeze out profits in a low-margin business that's fiercely competitive, and I have a tough time imagining that net margins will ever top 5% to 7%.
Gee, that's really the kind of business that I want to pay a huge multiple for.
Etc.
Fun anecdote from the Siebel Systems (Nasdaq: SEBL - news) conference call: Tom Siebel was speaking about the competitive threat from Oracle (Nasdaq: ORCL - news) and SAP and said, ``I think that Oracle and SAP are probably at least 18 months away from releasing a credible CRM product. But then again, I've been saying that since 1994.'' Ouch. (Thanks to my colleague Todd Bernier for this one.)
And here's an even better one from Tuesday's conference call detailing the AT&T (NYSE: T - news) breakup: Seems that CEO Mike Armstrong was going on and on about how the breakup is putting AT&T on the best possible path for future growth, and how he is personally offended by reports in the press saying the move is a repudiation or reversal of strategy. Huh? You know, if he was offended yesterday, he must be absolutely incensed by Thursday's Wall Street Journal coverage. (Thanks to Michael Hodel for this.)
Pat Dorsey can be reached at patrick_dorsey@morningstar.com.
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