WSJ followsup on Truthseeker's Oct19 Report on HAND @ $93.00
...just 40 points later.... Message 14619883
Nov 29,2000
public.wsj.com
Palm, Handspring Shares
Attract Wall Street Eyes
By Robert McGough and Pui-Wing Tam
Staff Reporters of The Wall Street Journal
Money managers are getting serious about their shopping: Palm or Handspring ? The stocks, that is.
Everybody knows that these companies' handheld computers -- the Palm and the Visor -- are going to be two of the hottest gifts this Christmas. But how about all of those shoppers who are more interested in stocks in their stockings? Which of the two tech shares to buy?
Both Palm and Handspring are growing by leaps and bounds. Palm actually makes money (and has since its 1998 fiscal year), while analysts don't expect Handspring to earn an annual profit until its fiscal year ending June 30, 2002. In a market that is distinctly unfriendly to profitless tech companies, does that make Palm a buy? Not so quick -- it's a lot more complicated than that, and you may end up wanting to pass on both, even after factoring in sharp declines Tuesday amid another steep drop in technology stocks. At 4 p.m. Tuesday on the Nasdaq Stock Market, Palm shares were off $6.28, or 14%, to $37.22, while Handspring was down $3.25, or 5.5%, to $55.56 a share.
You want growth? Both companies have got it. According to estimates from Bill Crawford, an analyst at Merrill Lynch, Palm's revenue will grow 88% to about $2 billion in the fiscal year ending May 31, 2001. He sees revenue at the smaller Handspring, meanwhile, growing 301% to $409 million in the fiscal year ending June 30, 2001.
In the absence of current earnings at Handspring, one way to compare the two stocks is to look at their price-to-sales ratios, or price per share divided by sales per share. Palm trades at roughly nine times projected calendar-2001 sales, Handspring at 15 times.
But as Handspring is growing faster than Palm, is its bigger multiple justified? Shouldn't investors pay more for a faster-growing company? One method for comparison on this front is the so-called PEG ratio, which divides the familiar price-to-earnings ratio by expected growth in earnings. Shannon Vanderhooft, a portfolio manager at Numeric Investors, calculates this ratio using price/earnings ratios based on projections of per-share earnings in fiscal 2002 for the two companies, as that is the first full year Handspring is expected to be profitable. The First Call/Thomson Financial consensus is for Palm to earn 22 cents then, and Handspring, two cents. Ms. Vanderhooft uses a consensus expectation for earnings to grow 35% a year for five years at Palm. She plugs in a 118% growth rate for Handspring.
The PEG ratios: five for Palm, 24 for Handspring, meaning Handspring is much more richly valued. Ms. Vanderhooft's conclusion: Both are fabulously expensive. Usually, she says, "I'm looking for PEGs around the one- to two-times range." Says Judy Bruner, Palm's chief financial officer: "The market values growth, and we're in a high-growth market."
Given Handspring's unusually high price, perhaps it isn't surprising that a number of money managers lately have begun favoring Palm over Handspring. Jay Tracey, manager of Berger Growth Fund, sold Handspring shares and bought Palm about five or six weeks ago. His reasoning: "People are favoring the predictability of growth rather than the rate of growth" because high-priced stocks are penalized so harshly when they miss their earnings nowadays. It's the "bird in the hand versus three in the bush."
One factor in Palm's greater predictability is that Palm is seeking to get more of its revenue from recurring sources, rather than from the sale of handheld devices. For instance, Palm has licensed the Palm operating system to other companies, even including Handspring, and revenue from license sales -- which typically have a higher profit margin than equipment sales -- should continue to grow, no matter which company wins the hearts and dollars of consumers.
"We prefer to own the leading player that has the intellectual property of an operating system," says Jeff Van Harte, a manager at Transamerica Investment Services, who favors Palm stock over Handspring at this point (and who also owns a Palm VII). "I have great respect for Handspring" because of its founders, Jeff Hawkins and Donna Dubinsky, who were the original Palm founders before leaving that company in 1998. Besides the operating-system revenue -- which is still tiny -- he also likes the more-predictable revenue Palm gets from selling wireless content. For a monthly fee, Palm owners can subscribe to MyPalm.com, an Internet portal that offers sports scores, stock prices and flight schedules, among other information. He used such content recently to book a flight.
Handspring, in contrast, is focused more on expanding its hardware selection. It leads in the realm of add-ons, such as an attachment that makes the Visor function like a cell phone. But sales of devices are seen by Wall Street as more subject to surprise and whim than recurring revenue. Moreover, expectations for Handspring's growth are so high that there is ample room for a shortfall -- especially as other companies are seeking to get a piece of the action, including powerhouse Sony, which is selling a Palm-OS device.
So far, Sony hasn't shown any inclination to cut prices; indeed, it favors the more upscale segment of the market. And Microsoft, which sells a handheld device using a different operating system, Windows CE, has, like Sony, been selling more-expensive devices. Prices tend to run between $350 and $440, compared with $150 to $500 for Palm and Handspring.
But even Handspring's executives are quick to acknowledge that theirs is a pricey stock. "We've long viewed ourselves as an old-fashioned business," says Ms. Dubinsky, Handspring's CEO. But the stock has been anything but old-fashioned: "The market cap of the company has been an out-of-the-body experience. Right now, it seems to be a gambling game. Frankly, I don't know what to make of it. But for us, it's fabulous -- it's a real vote of confidence and shows investors believe in us."
Write to Robert McGough at bob.mcgough@wsj.com and Pui-Wing Tam at pui-wing.tam@wsj.com |
