.KEYWORD peanalysis
.FLYINGHEAD INDUSTRY ANALYSIS
.TITLE Palm reading: an analysis of Palm, Inc.
.FEATURE
.SUMMARY Over the past few weeks, Palm has been receiving a lot of press, inspired in part by the companies’ recent announcements that it has lowered its fourth quarter outlook and that it has ended its merger agreement with Extended Systems. However, through a careful look at all the facts, Editor-in-Chief David Gewirtz has determined in this industry analysis that Palm and its products are both still great investments.
.AUTHOR David Gewirtz
Man, I gotta tell you, the guys at Palm have been really taking it on the chin these last few weeks. From what you’d read in some of the trade press, you’d think the company was doomed. But a little careful analysis will show you that’s quite far from the truth.
Part of the problem is that everyone’s a little shell-shocked from the post-apocalyptic dot-com crash. Suffering from the business equivalent of post-traumatic stress disorder, technology businesses are erroneously getting lumped into the same category as dot-coms. But they’re very different beasts.
The sort of dot-com epitomized by, say, Pets.com or Toys.com, was a business built on smoke and mirrors. Managers and investors proudly drank the bug juice and proclaimed that profitability was irrelevant. They tried to build businesses where the product was the stock value, rather than building businesses that made products.
Technology companies like Palm, Microsoft, and Lotus build real products with tangible proprietary value. In addition to excellent products used nearly universally in their markets, these companies also have loyal followings, possess exceptional market share, enjoy substantial brand awareness, are managed by smart people with solid business experience, and make money.
In short, these technology companies are everything the dot-coms weren’t. In fact, if you were to look for a good, clear definition of what would make a solid company, you’d look for a company with solid products, loyal followings, good market share, brand awareness, good management, and the proven ability to make money.
.CALLOUT Real companies like Palm are solidly built, seaworthy vessels, made to survive and thrive on the high seas.
Active readers will know I often use ships at sea as an analogy for business. It fits here as well. The dot-coms were fragile ships, with little attention spent on seaworthiness. Most of the effort was spent making sure the boat looked pretty. There were a lot of people onboard and even more people at the dock to see them set sail. By contrast, real companies like Palm are solidly built, seaworthy vessels, made to survive and thrive on the high seas.
When the seas are calm, like they were up until a year or so ago, the dot-com ships looked real pretty on the water, and the more tangible companies looked, perhaps, a little less exciting. But when the seas got rough, as they are in our current economic climate, the dot-coms were crushed by the first low wave, while the solidly-built vessels like Palm and Microsoft simply turned into the wind, cancelled a few real estate projects, and released a lowered earnings report.
In other words, the very fact that Palm’s been getting the recent press they’ve been getting, the fact that they’ve been able to adjust forecasts before the quarter ends and have been keeping on top of their business, helps reinforce the fact that they’re a solid business.
If you’re a smart investor (and I mean either investing in stock or even investing in a company’s products), you understand the differentiation between the strength and solidity of the ship and the roughness of the seas. It’s foolish to blame the ship for the behavior of the sea, as long as the ship builders were smart enough to take the sea’s potential ups and downs into account when constructing the vessel.
I think I’ve beaten that metaphor to within an inch of death, so let’s move on.
As an aside, in case you’re wondering, I don’t consider ZATZ, the publisher of this magazine, to be a "dot-com." We’re a magazine publisher; we simply deliver our magazines online. We have tangible proprietary value both in our patent-pending magazine production technology and in our editorial methodology, as well as solid partnerships, exclusive licenses, leading market share, seasoned, proven management, and considerable brand awareness. And, unlike dot-coms, we’ve run this business from day one to be a real business; we’ve been profitable every quarter and every month since we started.
Let’s get back to looking at Palm, Inc. Here’s a company with more than 76% market share. Not only does it sell its own machines, but its licensees are also thriving. In fact, it just signed high-volume PC maker Acer (which up until now has licensed Windows CE) as a licensee of the Palm OS. Palm recently released exciting new machines, including the brand-new color Palm m505, which is not only the smallest color handheld ever released, but also has potential for enormous expansion using the SD card slot.
Another way to look at a company is to factor in inertia. Imagine you’ve got a big, heavy ship (yep, the metaphor is back) sailing along at high speed. Even if they shut the engines off completely, that ship might take miles to come to a complete halt, simply due to inertia. You calculate the mass of the ship against the speed of travel.
Palm’s got an enormous amount of the "good" kind of inertia. With an aftermarket of over 155,000 developers and almost 13 million users who are all, almost universally, raving fans of the product, this is a market that would keep going under its own power even if the entire team at Palm decided to go on spring break for the next six months.
Sales have been good as well. Last quarter, sales were up 73% from the same quarter of the previous year. Now we know Palm’s forecasting lowered sales for the current quarter. But if you combine the two quarters, it all evens out, and they’re still selling a heck of a lot of machines, something like an almost unimaginable 20-30,000 machines each day!
Apparently, the company’s stock is also a great deal. Even though I’m not a stockholder, I can’t talk too much about stock because there are all sorts of wacky rules about how we talk about stock in the media. But I can tell you about how the stock is being viewed by analysts. According to NEWS.COM, one analyst upped Palm to "strong buy" from "buy." UBS Warburg analyst Don Young said Palm is "a very appealing
