Pre-View: Palm Faces Unrealistic Expectations
May 26 2009 - 9:30AM
Dow Jones News
No matter how well the Pre performs when it launches next month,
Palm Inc. (PALM) shareholders are bound to be disappointed.
The palpable demand for the smartphone - on which Palm has
pinned much of its hopes - won't be enough to overcome the hype
already fed into Palm's share price, up tenfold from its December
low. The high expectations are likely to lead to a stock price
retreat, mirroring the double-digit percentage sell-offs seen after
the releases of other notable new smartphones.
"Palm's current share price implies the company can walk on
water," Needham & Co. analyst Charles Wolf said in his
downgrade of the stock to underperform from hold. "We don't think
it can."
The launch does carry some risks: the Pre likely has a small
window to make a splash before other high-profile smartphones
debut; supply issues may mean potential new customers could get
turned away empty-handed; and Sprint Nextel Corp.'s (S) poor
service reputation may be a deterrent.
Regardless, the strength of the Pre and its underlying operating
system - which will likely be used to create a line of smartphones
for other carriers - is expected to help turn around the company's
fundamentals. Analysts see Palm posting a loss for the next two
fiscal years with revenue nearly doubling during that period.
Expectations for Pre sales are wide-ranging because few actually
have seen it yet. Most people's experiences have been limited to
fleeting glimpses at trade shows, blurry spy shots and a cameo in
recent Sprint ads.
Macquarie Securities analyst Philip Cusick estimates that Palm
and Sprint will sell 1 million devices a quarter and 6 million in
fiscal 2011. Needham & Co.'s Wolf said that to justify Palm's
valuation, the company will have to sell more than 10 million in
2011.
In comparison, AT&T Inc. (T) said the iPhone sold 2.4
million units its first quarter. Matthew Thornton, an analyst at
Avian Securities LLC, estimates that close to a million Blackberry
Bold units sold through AT&T in its first full quarter, while
Verizon Wireless, jointly owned by Verizon Communications Inc. (VZ)
and Vodafone Group PLC (VOD), sold 2 million Blackberry Storms.
Both AT&T and Verizon Wireless, however, have a much larger
base and are able to sell more phones than Sprint.
Sprint and Palm declined to provide their own internal
estimates.
Palm's stock price reflects a healthy dose of optimism - maybe
too much for some as the stock already has slid 17% from its peak
last week.
Shares are poised to fall further once the Pre is released. In
the weeks after the last iPhone was launched last July, Apple
Inc.'s (AAPL) stock fell more than 13%. Shares of Research In
Motion Ltd. (RIMM), after unveiling the Bold in November, lost
about a third of their value in the following month.
Apple remains well off its pre-launch levels, although RIM has
rebounded.
While Apple and RIM were able to overcome any launch-related
problems - for example, RIM's Storm had shortage issues - that may
not be the case with Palm, which is fully dependent on the success
of the Pre for its survival. It can ill afford a botched release of
the phone.
The Pre also needs a strong start because Apple is expected to
release its next iPhone in the summer, RIM is expected to launch
several new Blackberrys and new phones using Google Inc.'s (GOOG)
Android operating system are slated to show up later in the
year.
"The second half of 2009 will prove to be the most competitive
smartphone market ever," said Hugues de la Vergne, an analyst at
research firm Gartner.
In addition, there are hints that, like with the Storm, supply
may be an issue. Sprint Chief Executive Dan Hesse said he expected
shortages in the early days of the launch, and speculation is that
one of the main retail partners, Best Buy Co. Inc. (BBY), may only
get a limited supply of phones.
Sprint and Palm declined to comment on the potential
shortages.
Finally, the partnership with Sprint may limit its market.
Despite improvements, the carrier still suffers from the perception
that its customer service is poor. It has lost more than 6 million
contract subscribers in the last year and a half, and is expected
to lose another million customers this quarter.
Sprint hopes the Pre will be its halo product, drawing new
customers as well as keeping existing subscribers. It's unclear how
many people are willing to get past Sprint's reputation to get
their hands on a Pre.
"Sprint may have more difficulties in getting new subscribers to
switch operators due to customer perception than AT&T and
Verizon have had with the iPhone and the Storm," de la Vergne
said.
-By Roger Cheng, Dow Jones Newswires; 201-938-2020;
roger.cheng@dowjones.com
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