Investors, Not Users, Compare Palm vs. Research in Motion

Includes: BBRY, PALM
by: Richard Shaw

We recently published our opinion that Palm Inc. (PALM) may be a takeover candidate in the rapidly growing smartphone market. We also said that we feel the valuation metrics for PALM seemed to offer a better risk-reward ratio than Research in Motion (RIMM). And, we did praise some of the features of Palm's Treo.

The next day we received some emotional email from RIMM's Blackberry devotees questioning our competency and objecting to what they saw as "slamming" the Blackberry in favor of an inferior Treo. Those respondents missed the point of our analysis, so we'd like to try again. For clarity, this writer is a Blackberry user, not a Treo user.

Observing what does or may sell well and what does not or may not is an important component of investment analysis. However, it can lead to poor investment decisions if given too much weight or is taken out of context with other key issues.

The issue here is the difference between a great product, a great company and a great stock.

The goal of investing is to make money and not to swear allegiance to a favorite product or company.

Let's look at those three dimensions.


The Blackberry and the Treo are both at least good products in a minimally saturated market that has a rapidly growing appetite for smartphones. One report said that only 2% of cellular phones are also smartphones [which we think means phone and email as core capabilities]. Another report said that global sales of smartphones rose 300% from 2004 to 2005, and 75% in the first 6 months of 2006. That is enormous growth with a long way to go before saturation. Such rising tides tend to float all boats.

Since both Blackberry and Treo have good market recognition, and loyal followings of their own, both should expect rapidly rising sales over the next few years. That will probably translate to rapidly growing profits for each. One or the other will grow faster, but they will both grow rapidly. Which product is better is a matter of argument and intended use.

Smartphones were introduced initially to the commercial market, but now a strong push to the personal market is taking shape [including Motorola (MOT), Nokia (NYSE:NOK) and Samsung] with unclear future winners. Regardless of first place winner, all key makers will be general winners in terms of growth.


RIMM seems to be a "better company" than PALM right now, because:

1) They don't seem to have reported management turnover and potential conflicts of interest that have recently been reported for PALM.

2) They have put a critical patent infringement suit behind them that could have been very damaging, but PALM is just entering that patent dispute phase now.

3) RIMM still has lots of excess cash after their patent suit settlement, while PALM may not have a lot of excess cash after its likely patent suit settlement

4) RIMM has not experienced embarrassing product certification delays and downward revisions of near term earnings forecasts as has PALM.

For the sake of argument and to make the Blackberry loyalists happy, let's just say that RIMM has their act together more than PALM. We don't know if that is true, but assuming it is true helps us make our point.


RIMM is expensive for what you get and PALM is not expensive for what you get. Market enthusiasm for RIMM shares is overdone and market pessimism over PALM shares is overdone. RIMM won't go to the moon and PALM won't go to the cellar.

If you are momentum investor and your time frame is short, you may well be able to make some nice profits trading RIMM. If you are a long term value investor, you may be able to make some nice profits owning PALM.

Let's compare some basic information as to how the stocks of the two companies compare:

DEC 4 PALM RIMM Comparison

When we look at these figures, we see RIMM as a more successful company, whose stock market future is burdened by very high expectations. The distance to fall far exceeds the distance to rise. We see PALM as a successful, but less successful, company whose stock market future is not burdened by high expectations – in fact whose stock market future is brightened by very low expectations.

Each investor is different. Here's how we see it.

We see two good companies with good products in an industry with explosive growth that will richly reward each of them. RIMM has it all together and its stock has already been handsomely rewarded for that. PALM hasn't gotten everything entirely together, is running off revenue from an old line on non-smartphone products, and its stock has been punished and neglected for company performance.

We see good opportunity for PALM to exceed market expectations for growth and reasonable chance for RIMM to disappoint on growth. We see the downside on PALM if it disappoints as less than for RIMM if it disappoints.

We see the probability of exceeding expectations when starting from low base, as PALM is doing as being greater than the probability of exceeding expectations when starting from a high base, as RIMM is doing. Those probabilities arise not so much out of inherent characteristics of the companies, but out of inherent characteristics of stock market participants who take both enthusiasm and pessimism to overdone levels.

On top of all that PALM has a low enough market capitalization, a likely enough cash squeeze due to a patent dispute settlement, and enough brand equity for a major company to want to acquire them to enter the smartphone market in a major way.

We'd buy PALM before we'd buy RIMM today. We don't own any of either right now, but we are looking at PALM daily with an eye toward purchase.