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Palm, Inc.
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Palm Developer New to Stocks

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By Hallucigenia
February 18, 2003

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is there anyone out there with financial smarts that can recommend (and provide arguments for or against) buying shares of palm??

Be aware that on any company board, by definition, you will tend to get a biased opinion as they tend to be frequented by people who like the stock enough that they've bought it. I've never held any position in Palm stock, but I hang around here as I'm interested in the industry as a whole, and I do have a small position in Psion [PON.L], who via their 25% stake in Symbian might be considered a competitor of PalmSource. So value my advice for what you've paid for it, but here's my 2 Eurocents :

i'm a palm developer who's new to stocks... i figure since i have a hand in the future of the palmOS, i'd buy some of the company...

Actually, that's probably the single worst reason for buying any share - if your day-to-day livelihood depends on Palm's well-being, it's sensible to diversify your savings. Look at all the people who worked for Enron or Worldcom, had employee share options worth $100k's and suddenly found that they were out of a job and their savings were worth nothing.

is there anyone out there with financial smarts

There's nothing magic about it - it's just a question of number crunching. First of all, have a poke around the Palm IR site - http://ir.palm.com/ireye/ir_site.zhtml?ticker=palm&script=401&item_id=3 is a good place to start, but also follow some of the links in the sidebar.

That way, you can see what you're getting when you buy Palm. For the purposes of this argument, imagine not that you're buying a few shares, but that you're buying the whole company - at $14/share that would cost you about $400m. That business had sales of $963m in the latest twelve months for which there are figures, and even if you strip out the exceptionals, it lost $65m. Include all the bad stuff and they lost $280m. If you're looking on the bright side, they did sneak a tiny profit in the last quarter, but so they should have done - a complete set of new models launched going into Christmas, which is always their best quarter. Despite the launch of the Tungsten and Zire, their sales were down 9% year-on-year, and that's compared to the immediate aftermath of 9/11, when spending was severely depressed. This quarter they've already had to slash prices on the Tungsten, which suggests that they're probably going to return to losing money again. Don't forget that essentially Palm is a US consumer gadget company - 65% of sales are in the US. 94% of sales come from their hardware division, and the majority of those sales are Zires, the average selling price of their devices is just $160 (it's been declining about $10/qtr recently). That means you have to have a view on trends in US consumer spending over the next year or two.

What will be interesting is when serious competition to the Zires arrives in their US homeland, in the form of cheap Java-enabled cell phones. Already in the UK, you have quite sophisticated devices such as the Nokia 7650 and 3510 are available free with contract. It's hard to justify buying a Zire in that environment. As for the high-end of the market, Palm seems to be surrendering that to Sony and Pocket PC's.

So you have to wonder where the Palm hardware business will be in say three years time. Despite the new lineup, they're already struggling to make money, and are up against competitors with deep pockets in an environment where consumers and businesses aren't really splashing out on new toys. On the other hand, they are running the business a lot more effectively than they were - they got a real fright after they mishandled the transition to the m-series and got stuck with a lot of stock. They deserve a lot of credit for the way they've turned things around, I'm just not sure that hardware is a great business to be in right now. Certainly there have been a number of calls for them to dump the hardware side, and concentrate on the software side in the way that Psion have done with Symbian.

So what about Palm Source? It lost about $30m on sales of $69m. In the last quarter, revenues were down a touch year-on-year. Where are the increases in sales going to come from? Seems unlikely that Palm Solutions will do it for them, so you have to look at the licensees. Handspring? Almost finished. Samsung? Are trying any and every operating system, Palm, Microsoft, Symbian, even Linux. The fact that today they've ponied up $25m-odd to become a shareholder in Symbian gives one pointer as to which way they're moving. Which leaves us with Sony. And Fossil watches of course. Sony is pretty critical. They've got the resources to develop high-end features, and have a knack of producing devices that consumers want. They appear to be creaming Palm at the high end. OTOH, you're not going to see any smart phones coming from that direction, that's the department of Sony Ericsson, who are among the staunchest supporters of Symbian. I guess the best that could happen from the Palm point of view is that SE continues to lose money; the parents lose patience and close it down, and then Sony's pro-Palm Clie division could start making phones. It's a long shot, but possible I suppose.

I guess as a developer you'll have some views on where the market will go with smart phones versus standalone PDA's. Obviously there will continue to be a market for the PDAs, but as a European, it seems clear that many more smart phones will be sold than PDAs - in the last quarter, just one model, the (Symbian-powered) Nokia 7650 sold more units than Palm, Sony and HP put together in Europe. Will be interesting to see what happens when more models appear, particularly when the US gets a taste in the form of the SE P800 and the Nokia 3650. As I mentioned above, I think the fact that increasingly entry-level phones will have at least Java and possibly something like Symbian or Linux will have a big effect on sales of low-end Palms. That raises a question as to what platforms developers will choose to work with, which in turn will have a large effect on the success of PDA-only OS's.

On the flip side, a lot of this is already factored into the price of Palm shares, which look fairly priced at the moment. And they do have $270m in the bank. I just find it hard to get excited about Palm as a profit-making business though, and I think if your livelihood already depends on them, you should look at diversifying, into energy, or healthcare or something.

Like I said - that's just one opinion, from someone who doesn't hold Palm shares and does have a small stake in Psion/Symbian.

Fool on - and don't leave it so long until your next post!!

H


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