Internet 2001: Handheld-To-Handheld Combat

From now until the end of the year, The Morning Report will discuss each of the 13 Internet sectors and which members bear watching in 2001. On Tuesday we looked at some companies in the Speed/Bandwidth sector. Today we’ll focus on the key Wireless players heading into next year.

Palm and Handspring

Handheld electronic organizer device maker Palm has some powerful forces working on its behalf. Its PalmPilot hardware has a commanding lead in the Internet-enabled device market, while the company’s financial backers include America Online, Nokia and Motorola.

But Palm faces formidable challenges in the name of Microsoft – which competes with Palm to provide software and hardware for handheld organizers – and Handspring , formed in 1998 by Palm cofounders Jeff Hawkins and Donna Dubinsky.

For now, though, Palm has the upper hand, with sales of $401 million in its first fiscal quarter of 2001 (ended Sept. 1), compared to $70 million for Handspring in its most recent quarter. Further, PALM is profitable, posting net income of $17.3 million, or 3 cents per share, in its most recent quarter while HAND lost $16 million, or 17 cents per share.

However, the ‘Net handheld battle is just heating up. Palm’s share of the U.S. market was nearly 92% in March. By September it was down to 65%. Also, Palm has seen its gross profit margin fall to 37% in Q1 2001 from 43.7% in Q3 2000 as it seeks to compete against HAND’s lower-priced devices.

Indications are that both companies are experiencing high demand for their products during the holiday shopping season. This could mean a bump in their share prices when numbers for the quarter are released.

Given the booming market for handhelds, 2001 should be a good year for both companies. As an investor, though, I would consider Palm a safer bet for now, based on its profitability and more reasonable valuation (22x trailing 12 months’ revenue of $1.24 billion, versus Handspring’s 41x TTM revenue of $155 million).

Research in Motion

This Canadian company’s Blackberry wireless two-way pager is taking the corporate world by storm, with revenues expected to hit $183 million in fiscal 2001, ending Feb. 28. Now Research in Motion is turning its sights on the consumer market, striking distribution and partnership deals with AOL, Yahoo, Compaq and Dell.

RIMM, though, is expected to lose $9.7 million in fiscal 2001, slightly less than the $10.1 million loss in fiscal 2000. Merrill Lynch, for one, believes RIMM will return to profitability in 2002 on estimated revenues of $344 million.

Investors should keep an eye on revenue growth and gross margins, especially as companies such as Motorola launch competing products.

In late November, when shares dipped below $60, RIMM was a better deal than it is now. Based on Tuesday’s price of $87.38, RIMM is trading at 34x estimated 2001 revenues – expensive for a company losing money.

Openwave Systems

This may be the most interesting wireless company to watch in 2001. Formed by this year’s merger of and, Openwave Systems sells software that allows wireless network operators to offer ‘Net access via mobile phones.

The big key for Openwave is how fast usage of the wireless access protocol – for which the company played a key role in developing standards – spreads internationally. WAP caught on in Japan this year, and there are signs that its popularity will grow in Europe.

OPWV has sales of $107.2 million over the past four quarters, giving it a revenue multiple of 41x. Given its hefty losses ($166 million in the last quarter alone), it’s hard to see Openwave maintaining that altitude.

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