BTW, here is a good read on handheld companies:
Thumbs down to handheld stocks
By Paul R. La Monica
Redherring.com, October 30, 2000
Would you pay $3,000 for a brand-new Palm VIIx or a Visor Prism? How about $2,500 for a Research in Motion (RIM) 957 Blackberry?
If you answered yes to those questions, then congratulations, you just won the P.T. Barnum award for being a major league sucker. Go to a consumer electronics store (online or offline) and you'll find retail prices for the Palm and Visor at about $449, while the Blackberry sells for $499.
Odds are, though, that you're an educated consumer (I would expect nothing less from Fish or Cut Bait readers) and you scoffed at paying such high prices for these devices. But for some reason investors seem to have no problem whatsoever paying through the proboscis for the stocks of the makers of these gadgets: Palm (Nasdaq: PALM), Handspring (Nasdaq: HAND), and Research in Motion (Nasdaq: RIMM).
VALUATONS ARE ABSURD
For the past few weeks I've published columns about technology stocks that I believe are worth buying, even though they may be a bit pricey. But in this case, these three stocks seem to be so ahead of themselves, coasting on yet another absurd wave of momentum and hype, that I cannot in good conscience recommend buying them at these levels.
I don't care how cool it is to beam phone numbers from one's Palm to another's Visor. I don't care that, with the help of a service like Vindigo, you can use your PDA to find the best pad thai within a five-minute drive of your office. And I certainly don't care if you think your life would come to a screeching halt without your Blackberry wireless email.
This is what I care about: Palm currently trades at about 350 times fiscal 2001 earnings estimates, 243 times fiscal 2002 earnings estimates, and 16 times estimated fiscal 2001 revenues. But that's thrifty compared to Handspring, which trades at the obscene multiple of 2,947 times fiscal 2002 earnings estimates (that is not a misprint -- that is a four-digit price-to-earnings ratio) and 28 times fiscal 2001 revenue estimates. RIM trades at 758 times fiscal 2002 earnings estimates and 42 times fiscal 2001 revenue estimates.
Now, before you send angry emails, let me state that I am certainly not suggesting you short-sell these stocks. I am not saying that these are bad companies, either. Revenue growth has been phenomenal for the three companies as of late. RIM's revenue increased by 57 percent on a sequential basis in its second quarter. Palm posted a 14-percent sequential gain, and Handspring's revenues increased by 37 percent on a sequential basis. And the estimated long-term earnings growth rates for these companies are nothing short of spectacular.
According to First Call, analysts expect Palm's earnings to increase at a 41-percent clip over the next three to five years, and predict long-term earnings growth of 85 percent for RIM and 118 percent for Handspring.
My beef is with the valuations. Palm, Handspring, and RIM are priced to perfection. And as we all know, nobody's perfect. Using the 2002 price-to-earnings ratios and these long-term estimated growth rates to calculate a price-to-earnings growth ratio, you'd see that Palm is trading at about six times its growth rate, RIM at about nine times its growth rate, and Handspring at an unbelievable 25 times its expected long-term growth.
JUST ANOTHER TECH FAD
Should companies that make consumer electronics devices (that's really all they are, people) be trading at such heady prices? You'd think they were helping to map the human genome instead of simply making it easier for harried business people to remember their kid's next soccer game.
At these valuations, any evidence of a slowdown in sales for these companies will likely cause a huge bloodbath. Just look at what happened when wireless stud Nokia (NYSE: NOK) said back in July that it expected handset sales to be a little softer than analysts were expecting. The stock plunged more than 25 percent in a day. Momentum shifts can be brutally quick and exceedingly violent.
Haven't investors learned over the past few years that what the market giveth, it can clearly taketh away? We've seen stocks in the e-commerce, B2B, and Linux sectors -- to name a few -- rise on preposterous amounts of hype, only to take precipitous Thelma-and-Louise-like plunges off the momentum cliff. And now it looks like we're starting to see a correction in the optical networking and components area as well, as Nortel Networks (NYSE: NT)'s third-quarter results sent the entire sector into a dizzying tailspin.
But even though many of those stocks were ahead of themselves, too, I think there was more justification to buy companies like Ciena (Nasdaq: CIEN), Sycamore Networks (Nasdaq: SCMR), Juniper Networks (Nasdaq: JNPR), and JDS Uniphase (Nasdaq: JDSU), since they're all already profitable and have really fat gross margins.
In their most recent quarters, gross margins for JDS Uniphase, Ciena, and Sycamore were around 50 percent, while Juniper's gross margins were a Cisco-esque 67.3 percent. By contrast, gross margins for Handspring, Palm, and RIM in their most recent quarters were 31.2, 39.3, and 40.7 percent, respectively.
To be sure, these are pretty respectable gross margins for hardware companies, especially when compared with margins for PC makers like Dell Computer (Nasdaq: DELL), Compaq (NYSE: CPQ), and Gateway (NYSE: GTW). But that's still not enough to justify the outrageous multiples, plain and simple.
I have nothing against the PDAs. Admittedly they're pretty cool, although I have yet to take the plunge and buy one. But the biggest mistake an investor can make is thinking that, just because a company has some hot newfangled gizmo on the market, its stock must be a buy at any price. |
