Got Palm?

Several days ago, rumors were swirling that the Palm (PALM)
IPO would hit $400 per share. That would have been stunning. With
about 562 million shares outstanding, the valuation would be $224 billion.
That amounts to about 50% of the market capitalization of Cisco.

Of course, the Palm IPO closed yesterday at $95-1/16, up 150%. The market
capitalization is a more modest $53 billion. Although, Palm has a higher
market capitalization than its corporate parent, 3Com ($28 billion).

I think Palm has a tremendous business. As mentioned before in this column,
I’m a loyal user of the Palm VII, which connects me to the Internet —
anytime, anywhere.

Even though the company issued 23 million shares, chances are you did not
get any at the offering price. Rather, you had to dive into the
aftermarket — where the price ranged from 92-5/8 to $165.

Clearly, Palm is a dominant player in the fast-growing wireless market.
According to IDC, the company has a whopping 68% of the worldwide
marketshare for handheld devices.

Sales were $563.5 million in fiscal 1999 and profits were $29.6 million.
This compares to sales of $272.1 million and profits of $4.2 million in
1998. For the most part, the company’s revenues come from hardware sales.
But with the introduction of the Palm VII, the company is now generating
recurring service fees. Palm is also aggressively licensing its technology,
such as the Palm Operating System.

But Palm is not a slam-dunk investment. For example, Palm is party to
several lawsuits. Xerox is suing for willful infringement of a patent for
handwriting recognition. Losing the suit may require that Palm pay a
licensing fee for its famous Grafitti script software. Telxon and Penright!
are suing for copyright infringement, unfair competition and theft of trade
secrets over the Palm Operating System.

Of course, a huge challenge is maintaining its lead, which is no easy feat.
Wireless technology is extremely complex and the environment is very
competitive. After all, it took Palm about two yeas to develop the Palm
VII device.

But I think the biggest concern for investors is valuation. IPOs are
typically hyped events. Economic metrics are ignored, as investors buy in a
panic. However, in many cases, IPOs tend to fall in value, as the hype
subsides and the valuation normalizes. The fall can be particularly hard,
especially for ultra-hyped IPOs, such as VA Linux, which reached a high of
$320 and is now selling for $116-11/16.

With Palm, patience should be a virtue. Just wait.


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