PALM: Ready to Break Out?

Every once in a while, a stock breaks the barriers and totally changes its category. It moves from small cap to mid-cap to large cap and so on. In that process it increases its market cap by many folds perhaps even 20 times. Research in Motion (RIMM) did that from June 06 to Oct 07 and First Solar (FSLR) did the same from Jan 07 to Jan 08. For such a sustained stock run to happen, it has to be based on a fundamental change in company itself or in the company’s perception.

Recently, Palm (PALM) is showing a similar trend. It has grown almost 10 fold over the last 6 months with its current market cap at ~2.2 billion. The question remains “Is this for real?” and “can it continue?” Can Palm break out from its current levels again and reach a market cap of $10 billion? Palm has come out with its new smartphone (Palm Pre) which is considered a very competitive offering against “iPhone from Apple (AAPL)” and “Blackberry from RIMM”. So far, reviews on Pre have been great. Reviewers are bullish on Palm’s new WebOS, true multitasking capabilities and of course cordless electromagnetic charging capability for Pre. Here is a link to a CNET smartphone comparison.

Other companies planning new smartphone entries are Garmin's (GRMN) Nuvifone G60, T-Mobile’s Google (GOOG) Android-based myTouch G3 and Dell (DELL). It’s not clear how Dell is going to do it though resell, acquisition or joint development. The new entrants lack years of experience and market understanding that these three main players have and they may not dramatically alter current market share scenario.

Palm has sold almost 500,000 Pre units in the first month of its launch. Assuming Pre continues to follow this trend on average throughout this year, Palm will sell almost 6 million Pre units in its first year. Based on smartphone market growth projections at ~20% for the next 3 years that we see from multiple sources, it would sell 7.2 million units next year and 8.6 million units the year after. Although these may sound like small numbers compared with iPhone 3G S’s “million unit” performance just over a weekend, this would certainly bear a tremendous impact on Palm’s financials. Palm is currently selling just 3 million units per year in total for the total revenue of $1 B on average for the last two years on its existing phones. Palm is going to use subscription accounting (it's going to provide free of cost app and software upgrades to end users) for revenue and cost recognition on a useful life assumption of 2 years for Pre's product line and hence initial revenue impact may be less prominent in the financial results in the first two years until we get to the full 24 months rolling revenue impact from unit sales each month.

Palm Pre, as a premium product, should be able to generate higher per unit revenue than the $300 per unit we see on existing Palm products. Assuming conservative revenue impact of $200 per year per Pre unit (total $400 for the unit with active life of 24 months for subscription accounting) for OS license, apps and hardware combined and 3.25M effective full year revenue equivalent units sale estimate, the total revenue impact of Pre should be $650 million in the first year. The number of effective units in the second year would be around 9.9M with total revenue impact to Palm of $1.98 billion. Even assuming substantial cannibalization of Palm’s other phone sales of 60 to 70% by year two, this would result in more than 50% growth for a couple of years to come.

All this analysis is based on the assumption that the total smartphone market share picture does not changemuch. iPhone and Blackberry maintain their supremacy and overall market dynamics remain the same with Nokia smartphones and existing mobile phones losing market share to smartphones. However if Pre alters that equation, which it should based on its strong OS and multitasking abilities, all that is left for Palm to do is execute properly.

Here is PALM’s recent stock price performance. It looks like lot of Pre’s impact may have already been built into the stock price.

As we can see, Palm is tracking above its 20 days moving average consistently over the last 6 months, with one or two minor exceptions. If one can get Palm close to its 20 day moving average,e it should be a good price to enter the stock. We will also have to see whether Sprint (S) can do the same thing with Pre that AT&T (T) did with the iPhone and Verizon did with Blackberry. If Sprint can only support Pre in reaching its potential, there is no reason for Palm to not realize revenue numbers we just talked about above. And if Palm does that, there is no reason it should not triple or quadruple its stock price from the current levels.

Disclosure: Long PALM, no position in Sprint.

Comments

[Yagottabe K...:]

> ...Palm has sold almost 500,000 Pre units in the first month of its launch...

Uh huh.

Jul 02 06:51 AM

[Palm rot:]

Unrealistic scenario. It's more likely that PALM has sold 150,000 Pre units and that the pace will drop off even more as anemic Sprint demand and competition provide added pressure. Further, if rumors of Pre's production cost and yield problems are even remotely correct, there will be no profit for PALM even if sales pick up. Break out? No. Collapse? Better question.

Jul 02 07:05 AM

[typopolice:]

of course, 500k in the first month automatically translates to 6 million a year, it's simple multiplication after all!!

Last time I checked, there was no word from PALM or Sprint on sales, yet the number sold in the first month grows exponentially every day.

Jul 02 07:41 AM

[brewer:]

Cordless electromagnetic charging? You are clearly succumbing to marketing there, iPhone and iPod before it had that problem solved years ago with the dock. In fact, the Apple dock has opened up to the new developer APIs such that hardware, household goods, appliances can all access information on the iPod/iPhone.

Pre is merely a wanna-be iPhone with very little application or peripheral markets. Apple already has these markets wrapped up, and is soon to be in China and on multiple networks in the US.

Jul 02 09:00 AM

[Jon T:]

Are you kidding me?

Have you seen that Palm, as always, has screwed up the execution?

Try reading this is you don't believe me.

abcnews.go.com/Technol...

Jul 02 09:26 AM

[mollytjm:]

i wouldn't put much faith in the stocks 'growth'...it was in pretty bad shape so it wouldn't have taken much. Palm's Treo was hyped the same way and it was incredibly glitchy and they never really fixed it, just kept sending customers new ones. I can't even remember how many we had...it was a lot.
It just can't do what the iPhone does and it doesn't have a zillion apps or a wonderful OS.
And Dell is going to make a smartphone? That'll be interesting:)

Jul 02 10:25 AM

[CGP:]

<<Have you seen that Palm, as always, has screwed up the execution?>>

- Until there's evidence that a large pct. of units have this problem this doesn't detract from Palm's ability to execute. In fact they've been smart in pacing the rollout because I'm sure they expected some issues such as this.

They've already done three things well:
1) increase share price and created stock momentum
2) produced a product that has been well reviewed and received(excepting iPhone phandom/trolls)
3) created "buzz" around a company that was dead in the water

Jul 02 10:28 AM

[User 406375:]

Hard to compete with the iFanatics here!

I am a huge fan of the Palm Pre, one of the greatest gadgets I've owned, and IMHO functionally better than the iPhone on several fronts. That said, I am concerned as a PALM shareholder on several fronts:
1. is 500k total sold or total shipped?
2. multiple reports of supply problems
3. multiple reports of QC issues (I'm on my third Pre myself)
4. app catalog still in beta, no new apps seen recently
5. Rubinstein is a brilliant engineer, will he also shine as CEO?

IMHO stock run up is extremely premature, and I wonder whether investors are getting ahead of themselves with regard to expectations.

Jul 02 11:40 AM

[Yagottabe K...:]

> ...Rubinstein is a brilliant engineer, will he also shine as CEO?...

Though the "brilliant" part is a reach, the rest is something very few have even brought up much less seriously discussed.

Being a SVP in charge of hardware (not software) does not a CEO make.

Jul 02 11:44 AM

[Jon T:]

"They've already done three things well:
1) increase share price and created stock momentum
2) produced a product that has been well reviewed and received(excepting iPhone phandom/trolls)
3) created "buzz" around a company that was dead in the water"

Have they?

1) Is the result of hysterical wishful thinking and hype
2) Is not true until the jury is in. People on their THIRD Pre in one month?
3) Is also little more than hype.

I am delighted for Palm to create a decent device - I was an early supporter of the Treo - but their approach has been unsubtle, arrogant and designed to up the hype and downplay reality.

And the difference with Apple is that the latter always says let and does more. Promises less and delivers more.

Palm have a lot more to do in my eyes before they climb out of the crater they are in...

Jul 02 12:36 PM

[JATOreality:]

so if we extrpolate the 40K units sold in the past week does that mean 2mm units sold annually the new working number? What market value does that justify? Unreal...

Jul 02 03:43 PM

[Techno-Icon...:]

Wow there's a lot of revisionist history going on here with the iFanatics. Do none of you remember when the iPhone launched? Did it have 3G? No. Did it have MMS or tethering? No. Did it have an App Store at all or 3rd party applications? No. Did it have initial QC and supply problems? Yes. Does the latest model still have QC problems? Yes, just google for "overheating 3gs".

Does Palm still have a long way to go? Sure they do. Will they be plagued by the same problems as in the past? Probably not, because two of the guys that did the real work to turn Apple around are now at the helm at Palm. These guys know how to deliver products and how to run an organization that designs and builds groundbreaking products.

Is Palm going to 'break out'? They have a decent chance if they can capitalize on this momentum over the next two years just like Apple did over the last 3 years. The smartphone market is only growing. To say that Palm and RIMM aren't going to be stealing overall share from Motorola, Nokia and Sony/Ericsson is just naive. The big three in smartphones will most likely be Apple, Palm and RIMM in two years unless someone drops the ball.

Jul 02 03:43 PM

[Tim Nash:]

Look at the fundamentals. 'Analysts' have talked about estimated sales not real sales. Palm is burning through cash and will find it difficult raising more to take advantage of any Pre momentum. The launch of the Pre already looks rushed, with the SDK not generally available for developers and reports of hardware failures. The odds are on Palm shareholders losing out. Check out my article lowendmac.com/nash/09t...

Tim Nash

Jul 02 04:18 PM

[peter02l:]

You seem to forget when iPhone initially came out there were no products quite like it. Pre on the other hand was one-upped in a week.


On Jul 02 03:43 PM Techno-Iconoclast wrote:

> Wow there's a lot of revisionist history going on here with the iFanatics.
> Do none of you remember when the iPhone launched? Did it have 3G?
> No. Did it have MMS or tethering? No. Did it have an App Store
> at all or 3rd party applications? No. Did it have initial QC and
> supply problems? Yes. Does the latest model still have QC problems?
> Yes, just google for "overheating 3gs".
>
> Does Palm still have a long way to go? Sure they do. Will they
> be plagued by the same problems as in the past? Probably not, because
> two of the guys that did the real work to turn Apple around are now
> at the helm at Palm. These guys know how to deliver products and
> how to run an organization that designs and builds groundbreaking
> products.
>
> Is Palm going to 'break out'? They have a decent chance if they
> can capitalize on this momentum over the next two years just like
> Apple did over the last 3 years. The smartphone market is only growing.
> To say that Palm and RIMM aren't going to be stealing overall share
> from Motorola, Nokia and Sony/Ericsson is just naive. The big three
> in smartphones will most likely be Apple, Palm and RIMM in two years
> unless someone drops the ball.

Jul 02 05:23 PM

[marnold2000:]

<quote>3. multiple reports of QC issues (I'm on my third Pre myself)</quote>
I'm curious how you can be a big fan of a product that you have already had to exchange twice in one month?


On Jul 02 11:40 AM User 406375 wrote:

> Hard to compete with the iFanatics here!
>
> I am a huge fan of the Palm Pre, one of the greatest gadgets I've
> owned, and IMHO functionally better than the iPhone on several fronts.
> That said, I am concerned as a PALM shareholder on several fronts:
>
> 1. is 500k total sold or total shipped?
> 2. multiple reports of supply problems
> 3. multiple reports of QC issues (I'm on my third Pre myself)
> 4. app catalog still in beta, no new apps seen recently
> 5. Rubinstein is a brilliant engineer, will he also shine as CEO?
>
>
> IMHO stock run up is extremely premature, and I wonder whether investors
> are getting ahead of themselves with regard to expectations.

Jul 02 05:33 PM

[Techno-Icon...:]

On Jul 02 05:23 PM peter02l wrote:

> You seem to forget when iPhone initially came out there were no products
> quite like it. Pre on the other hand was one-upped in a week.

You guys don't seem to understand that the Pre doesn't need to compete with the iPhone. There's tons of room to grow in that segment of the phone market simply by competing with the likes of LG, HTC, Samsung, MOT & Nokia.

www.mobilemarketingmag...

Or maybe you should get some research on the handset market...

www.pyr.com/mhfcst.htm

Palm's gonna fail because they won't compete against Apple? There's just zero actionable data in that sentiment.

Jul 02 05:50 PM

[patito:]

SPRINT (S):
Technically this stock is losing Momentum in its Near and Medium term. BUT...

If you compare to a similar situation from last days of August till November 2008', its Long Term was adding pressure to the downside, while NOW its Long Term Momentum just started to move UP, giving good support.

So that implies that this correction is a GOOD OPPORTUNITY for adding positions in (S) for the Long Term.

For its Near Term 4.22 level is an important support.
And on the other hand, any move over 4.85 it would be enough to regain Momentum.

Remember the "rumors" about a joint venture between (S) and (LVLT). When this is already finished...both stocks would benefit.

Jul 03 03:32 AM