Palm: From Hype to Reality

Palm (PALM)
was one of the most over-hyped IPOs in history (and, yes, I helped provide
some fodder for the hype machine). The stock price hit a high of $165 and,
from there, collapsed. Now, the stock trades for $40-3/8. The market
capitalization is $22 billion.

From its inception, Palm has been a hardware company, selling handheld
devices. Hardware revenues tend to have relatively low margins.

However, with the introduction of the Palm VII, Palm is transitioning
towards a subscription model. Of course, these revenues carry much higher
margins. In fact, this is what happened to the cell business. Phones became
free and the revenue model transformed to a subscription model.

But what makes Palm so attractive is that it is the de facto standard for
digital handheld devices. Currently, the company has 68 percent of the
worldwide market. History has shown — such as in the cases with Microsoft
and Intel — that standards translate into great shareholder wealth.

Actually, Palm appears to be much more than a consumer device. Rather, it
has many possibilities for corporate uses. Palm has announced deals with
Sun, Siebel and Tivoli so as to customize the Palm for the enterprise IT
infrastructure.

The Palm platform is also proving to be extremely flexible. For example, the
company announced an agreement with ePocrates to create customized Palm
devices for physicians. ePocrates has a network of over 30,000 physicians.

Palm’s dominance has been translating into strong financial results. In the
company’s latest quarterly report, Palm grew its earnings by 116 percent to
$15.5 million. As for revenues, these jumped from $125.9 million to $272.3
million. What’s more, Palm has was able to raise $1.17 billion in its IPO
and private placements from Nokia, Motorola, and AOL.

Of course, a huge challenge for Palm is the competition. With the market for
handhelds expected to grow substantially, competition is inevitable. Despite
this, Palm may benefit anyway. After all, one of Palm’s biggest competitors,
Handspring, is a licensee of the Palm Operating System.

Further, Palm is a founding member of the Sync ML initiative. The group —
which includes such biggies as IBM, Nokia and Motorola — is establishing the
standards for universal synchronization for mobile devices.

Yet, it has been tough going for Palm during the past few months. Nasdaq
fell hard. There was the filing of the IPO of Handspring. And there are
rumblings of more competition on the horizon. For example, Microsoft is
expected to announce next week its Pocket PC software system. This will
likely have a short-term negative impact on Palm.

All in all, it seems that much of the bad news is reflected in the stock.
Thus, Palm looks to be an intriguing investment opportunity.

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