Tech Stocks : Hardware & PCs
Palm May Not Have the Whole World in Its Handheld Any More
By Carolyn Koo
Staff Reporter
3/27/01 5:41 PM ET
Updated from 12:41 p.m. ET
Lighter, thinner, faster, more colorful -- all adjectives harnessed by handheld-device makers to entice consumers to buy their new products.
A slew of new PDAs (personal digital assistants) have come to market of late, from the likes of Palm (PALM:Nasdaq - news) and Handspring (HAND:Nasdaq - news), as well as consumer electronics giant Sony (SNE:NYSE ADR - news) and PC makers Compaq Computer (CPQ:NYSE - news) and Hewlett-Packard (HWP:NYSE - news).
And despite its own rollout of snazzy low- and high-end products this month, Palm, the world's leading maker of handheld devices, inevitably will lose market share to its rivals. And considering that Palm pulled in 97% of its revenue from hardware in the second quarter ended Nov. 30, that market-share loss will eat into the company's sales.
Some analysts and investors say Palm's market-share losses will be more than made up by revenue from its licensing business. But licensing makes up a tiny portion of its business now, so it'll be some time before that is a major contributor. Palm officials couldn't be reached to comment.
Palm also signaled Tuesday that it, and possibly other handheld makers, may have other problems, too. When it released quarterly results, the company said "the effects of the deteriorating macro economic environment" are creating flat demand this quarter compared with the same quarter a year ago. It expects revenue in the range of $300 million to $315 million.
More Equals Less
With more products out there, "Palm's market share will continue to drop," says Thomas Carpenter, an analyst at regional brokerage firm Hilliard Lyons. "Its new products might stabilize that share, but Handspring continues to have the edge on product design." (He rates both Palm and Handspring holds, and his firm has done no underwriting for either company.)
Palm had a 65.7% market share of devices sold in January (the latest figures available), according to research firm NPD Intelect, far ahead of No. 2 Handspring, which makes the Visor handhelds, at 18.8%. Casio had a 5.5% share, Compaq and H-P each had a 3.2% share and Sony had a 1.9% share.
Palm's stable of products now includes devices similar to Handspring products already out there. The m500 (which retails for $399) and m505 ($449), which run on the newest version of the Palm operating system, both include an expansion slot for additional applications, a feature that distinguished the first Handspring Visors from their Palm counterparts. The m505 also has a color display, like the $449 Visor Prism. "Palm's been somewhat catching up to Handspring," Carpenter says, noting the similarities between the Palm and Handspring products.
But Handspring -- which introduced the Handspring's Visor Edge, which looks like Palm's slim and popular Vx -- isn't the only company that will eat away at Palm. There's also Compaq's enhanced iPaq ($649), H-P's Jornada 525 Pocket PC ($359) with a color display, and an updated version of Sony's Clie ($405) available only in Japan.
More Competitors
Never mind Sharp (SHCAY:Nasdaq ADR - news), Japan's leading maker of handheld devices, which said Friday that it would be selling its Zaurus product in Europe and the U.S. by the fall. NEC (NIPNY:Nasdaq ADR - news) and Toshiba (TOSBF:Nasdaq - news) also have said they'll have a handheld device on the market by the end of this year, according to Joseph To, an analyst at Lehman Brothers.
Compaq is "gaining a little bit" in popularity, Carpenter explains, but he doesn't expect large gains, mostly because its products are more expensive and consumers don't associate Compaq with handhelds.
But some investors don't seem to care that Palm's market share will diminish. In fact, they're pinning their hopes on the company's revenue from the licensing of its operating system. Devices that run on the Palm OS, including those made by Handspring and Sony, outnumber those that run on Microsoft's (MSFT:Nasdaq - news) rival Pocket PC operating system (formerly Windows CE).
"In anyone's financial projections, Palm's 70% market share will likely fall to 60% or 55% over time. That's fine," explains Chris Bonavico, portfolio manager of the Transamerica Premier Aggressive Fund. "But the Palm operating system is still going to be very dominant." (His fund has a holding in Palm.)
Seeking Software
"I would not be interested in it as an investment" if Palm were merely a hardware company, he adds. Bonavico estimates that licensing revenue will start to become significant next year, growing to 25% over the next several years and making big contributions to profits.
In the fiscal second quarter, though, licensing fees made up only 1.3% of Palm's revenue. Since that figure won't dwarf Palm's hardware revenue any time soon, relying on licensing is a longer-term strategy. Todd Bernier, an analyst at Morningstar.com, dismisses the doubling of licensing revenue from 1% to 2%, saying it's "still not significant." (He doesn't rate stocks, and his firm doesn't participate in underwriting.)
Right now, devices are still Palm's main business. Despite the hype about licensing, "Palm would like its market share [in devices] to be as high as it can be," Carpenter of Hilliard Lyons concludes.
But doing that won't be easy if Palm's competitors have anything to say about it.
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