Phone.com’s Fantastic Flight

It finally cooled off, dropping almost 20% from Tuesday to Thursday’s
market close, but Phone.com remains the biggest gainer of all Internet
stocks in the past month.

Shares of PHCM were back up again Friday, too, even as the Nasdaq and
most Internet stocks were being battered. After closing Thursday at $115
per share — down from $141.88 on Tuesday — Phone.com was trading at $128
early Friday afternoon.

Phone.com’s stock currently is worth nearly three times the Aug. 4
closing price of $45.38, and nearly twice the July 29 closing price of
$66. Right now, PHCM shares are among the half-dozen most expensive of
all Internet stocks, and its market cap of $3.8 billion puts the company
formerly known as Unwired Planet among the top 20 or so most highly
valued Internet players.

It also may be the most overvalued of all Internet stocks. With $2.2
million in sales in 1998 and $6.7 million in the nine months ended in
March, Phone.com stock is trading at anywhere from 300 and 2,000 times
revenue.

So what’s behind all the excitement?

Several things. In the short-term, the company, which went public on
June 11 at $16 per share, got a huge boost earlier this month when
Sprint’s PCS division announced it would sell new wireless phones
featuring Phone.com’s software. PHCM rose 30% that day and kept
climbing.

The software enables cell phone users to access the Internet and
corporate intranets to use e-mail and get basic information such as
stock prices, weather, sports scores and driving directions.

Not only does this sound really cool, it is an inevitable step as the
Internet and wireless technology continue to converge.

Unfortunately, sometimes cool and inevitable technology products don’t
catch on. Remember pen-based computing? Sometimes it’s just a matter of
bad timing, but I think there is a more fundamental problem with the
notion of Internet access via phones: The trend toward smaller cell
phones conflicts with the need for adequate screen size when using the
Internet.

In other words, they’re two different pieces of hardware, used for
different things. Have you ever tried to download e-mail on a cell
phone? Don’t expect any Excel spreadsheets. The tiny screen means only
the shortest text messages are worth viewing.

And when was the last time you wanted to surf on a two-inch wide
monitor? It just doesn’t work.

The other problem here is that virtually every widespread deployment of
wireless technology has taken longer than the industry expected, in
large part because wireless world is a dense jungle of warring standards
efforts. Wireless data to a cell phone sounds great, but let’s see it
work consistently first.

None of which is to say that Internet access via wireless phones don’t
have a future. Market research firm Dataquest estimates the number of
wireless data subscribers in the U.S. will grow from 1.4 million last
year to 36 million by 2003. Dataquest projects a $3 billion-plus market.

It’s a crowded market though, with GTE, Qualcomm, Pacific Bell,
AirTouch Communications, Omnipoint and many other players.

All of which is to say that this level of investor enthusiasm for
Phone.com is premature. It’s an interesting, early-entry company in an
industry with large competitors and a history of nagging technological
issues. I just wouldn’t buy into that at today’s prices.


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