Hype is a funny thing.
The actual term tends to have a negative connotation with investors. Companies or new products fail to live up to the hype. "Don't believe the hype," shareholders are warned.
It's odd, isn't it? Upbeat terms like "hype" and "Pollyanna" become disparaging in context, even though history is full of rollouts that more than lived up to their lofty expectations like the iPod, the BlackBerry, or the Wii. More often than not, though, reality isn't as shiny as its airbrushed promise.
If you follow this weekly column, you know I'm not about to butter up a company. I'm about to tear one down. Hype can inflate a share price, and I think I've locked in one ready to burst.
I don't just trash a stock in this column. I also offer up three stocks that I think will be better replacements in your portfolio. You deserve it. My inner optimist begs for it.
Who gets tossed out this week? Come on down, Palm (Nasdaq: PALM ) .
Tickets to the Pre show
Something spectacular will happen to Palm next week. The Pre -- the company's bold shot at renewed relevance in the smartphone game -- hits the market on June 6. Palm has been a forgotten pioneer in this space, and this is the company's shot at working its way back to the big-kids' table.
There are two problems here for prospective investors. The first, of course, is that expectations are already quite high. The stock bottomed out at $1.14 five months ago. It is now a 10-bagger. You read that right. Shares of Palm have soared tenfold since December, mostly on the hope that the cutting-edge Pre -- announced in January -- will make Palm a contender in a booming market in which it was unfashionably early before.
The second problem is that the odds are stacked high against the Pre. BlackBerry and iPhone are the aspirational smartphone brands, and they have already carved out the "app store" ecosystems and collectively landed tens of millions of subscribers.
This is more problematic than you think. Switching costs are high in the wireless space. Most BlackBerry and iPhone devices are subsidized when sold, locked into two-year contracts. It's also no longer about losing purchased ringtones or the burden of porting contact lists. Folks are spending money on smartphone apps. In other words, they are also investing in brand loyalty.
So how big is the market that's left? More importantly, how big is the potential market that isn't committed to making a 3G iPhone, a BlackBerry Bold, or a wireless handset powered by Google's (Nasdaq: GOOG ) Android their next phone?
SprintNextel (NYSE: S ) is the company putting out Palm's Pre a week from Saturday. Its lowest-priced monthly plan that features unlimited online use -- a must with smartphones -- starts at a whopping $70. How many of those who can afford $70 a month (or $100 for Sprint's unlimited Simply Everything plan) haven't already gone with an established smartphone?
In the meantime, Palm's income statements come in only one color: candy-apple red. Palm lost money in fiscal 2008. Analysts expect the company to post deficits in 2009 and 2010. Imagine how much uglier the financials will get if the Pre is a dud.
Palm isn't worthless, but the tenfold advance isn't justified. Gravity will take hold again as the hype rightfully fades.
Good news
As I have every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting tossed. Let's go over three new fill-ins.
- Research In Motion (Nasdaq: RIMM ) : The smartphone leader is still growing nicely. The BlackBerry giant's top line soared an amazing 84% in its latest quarter. There are now 25 million BlackBerry subscribers. The stock also trades at an attractive valuation given its pole position in the industry, fetching just 16 times next year's profit target.
- Apple (Nasdaq: AAPL ) : I'm a bigger fan of RIM than Apple, but it's hard to resist the company that revolutionized the industry with its iTunes App Store. Transforming its iPhone -- and iPod touch -- platform into a marketplace for developers is raising the ceiling on what is possible in this niche. Sure, this would be good news for Palm if the Pre is a hit, but that is becoming a bigger challenge with every new iPhone or BlackBerry purchase. Palm struggled to find its place in the world when its biggest threat was Nokia (NYSE: NOK ) several years ago. It now has more cash-rich style merchants to battle. If style points still matter, it's hard to choose Palm over Apple.
- Best Buy (NYSE: BBY ) : No matter who wins the smartphone race, Best Buy is sitting pretty. Yes, Best Buy will be selling Palm's Pre next week. It's actually shaping up as the place to buy a Pre, since it's offering the phone for $199 with a two-year contract (instead of $299 with a $100 mail-in rebate at Sprint store locations). It's no surprise that Best Buy was the first third-party retailer to begin selling iPhones. It has a ton of BlackBerrys available. It's also there for those who need more cost-effective pricing plans on conventional wireless handsets.
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