High Fives for Palm

By Richard McCaffery (TMF Gibson)
December 14, 1999

Shares of networking equipment company 3Com (Nasdaq: COMS) spiked more than 10% early today after Palm Computing, its wholly owned subsidiary and the leading handheld computer manufacturer, filed plans to raise up to $100 million in its initial public offering.

The company didn't disclose the number of shares it will sell or provide a share price, but its registration statement did contain a nice surprise for investors who follow the mobile computing market. Technology heavyweights America Online (NYSE: AOL), Motorola (NYSE: MOT), and Nokia (NYSE: NOK) plan to buy up to 4.5% of Palm's shares at the time of the IPO. In addition, Palm will license its handheld operating system to Motorola, which plans to develop devices built around Palm's simple platform.

Investments by companies such as these help validate the mobile computing market, which has been around for a long time but only recently started delivering on earlier promises.

The Palm device and competing platforms such as Microsoft's (Nasdaq: MSFT) Windows CE have become very popular as personal digital assistants -- electronic organizers used to schedule appointments, take notes, and jot down phone numbers.

According to Christopher Fletcher, managing director of enterprise business applications at market research group Aberdeen Inc., Palm has been growing market share faster than rival Microsoft over the last five years. From 1995 to 1999, of the roughly 9 million personal digital assistant units in use, Palm has 45% market share, Microsoft has 25%, and London-based Psion (OTC: PSIOF) has 19%.

Palm is viewed as easy to use, and it's well known among consumers, whereas Microsoft's devices are bulkier, Fletcher said. On the other hand, the Redmond, Washington company's devices feature color screens, receive voice messages, and the Microsoft name carries a lot of clout in board rooms.

It should be a good fight.

But the real growth area for handheld computing lies in the enterprise software space, where Palm and its competitors want mobile workers accessing corporate software from the field. Say you're a home health aid out visiting patients three days a week. With the right handheld device and software you could send information back to the corporate network at the touch of a button, receive a doctor's instructions, and file paperwork automatically.

Companies are hungrily searching for ways to make employees more efficient, and mobile computing fits the bill. The question is, whose software platform will dominate the mobile computing space?

So the race is on to sign up third-party vendors to develop applications for mobile platforms, and here both Microsoft and Palm are pushing hard. Palm has signed up companies in the enterprise software space such as Oracle (Nasdaq: ORCL), SAP (NYSE: SAP), Sybase (Nasdaq: SYBS), Computer Associates (NYSE: CA), and Remedy (Nasdaq: RMDY). Overall, it has more than 29,000 third-party developers working on software for its devices, which makes a pretty healthy user base.

Although Palm's margins aren't fantastic (its gross margins for fiscal 1999 came in at 44%), its financials look pretty sharp. Revenues jumped 394% to $564 million since 1997, and its net income increased 610% to $29.6 million in the last year alone.

More importantly, the company's generating excess cash from operations and has a nice-looking balance sheet: few liabilities, little in the way of inventory, and slow-growing accounts receivables, meaning the company isn't letting sales get ahead of its ability to collect receipts. Also, its business model is pretty light since it outsources manufacturing of its PalmPilot devices.

Since Fools invest in industry leaders with strong financials, and Palm looks solid, the company is worth further investigation.

Another worthy investment: contributing to Foolanthropy!

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