Walk into Best Buy, as I did the other day, and go looking in the computer area for handhelds. You won't find them. They're over with the cell phones, pagers, and other GameBoys for grown-ups. The hottest little one right now is Handspring's Visor, a PDA, or personal digital assistant, with lots going for it.
Visor Deluxe comes in five cool colors, including a clear version I like called Ice. Also, the device boasts an expansion slot, called Springboard, that lets it morph into a digital camera, an MP3 player, or some other toy. Yet at $249, it's as cheap or cheaper than the duller Palms, which rule PDAs as IBM once did PCs. The salesmen at Best Buy and CompUSA, another spot I hit, steered me toward it, past rivals Palm and Casio. In April, Visor's first full month in stores, it won 29% of PDA sales at retailers, PC Data reports, slashing Palm's market share to 69% from 96% a month earlier.
Impressive, and good reason to get excited about Handspring's imminent initial public offering. Handspring holds the added allure of being run by Palm's originators, Jeff Hawkins and Donna Dubinsky, and is backed by such top venture capitalists as John Doerr of Kleiner Perkins Caufield & Byers. And with the IPO market so tepid, the expected price of the $180 million deal, led by Credit Suisse First Boston, had to be cut to $18 a share from $20.50.
HEAVYWEIGHT COMPETITORS. Yet the way I see it, investors who don't get in at 18--which would be most of us--have good reasons for caution. Despite its swift start, Handspring is nowhere near profitable. Since selling the first Visor from its Web site last fall, Handspring collected $50 million in revenue through its third quarter, ended on Apr. 1. It netted a loss of $41 million. Even before noncash costs, Handspring lost $12.5 million. Sales now are going like gangbusters, yet the company sees nothing but losses into 2001.
The prospect of spreading overhead, sales, and research costs over more revenue ought to promise better profitability. But even market leader Palm, with estimated sales of nearly $1 billion for the year just ended in May, expects its gross margin to be squeezed, from 44% to as low as 35% in coming years. Handspring's executives are keeping quiet ahead of the IPO, but its securities filing indicates that they, too, see their gross margin, now just 32%, dwindling.
If sales are so strong, what's wrong? In part, PDA companies are having to pay higher prices for flash-memory chips and displays, as cell-phone and other wireless gadget makers vie for tight supplies. A bigger worry is competition. Palm cut prices this year to counter Handspring as well as Microsoft's Pocket PC, which uses a version of Windows. Handspring must also contend with such heavyweights as Sony. Like Handspring, Sony has licensed Palm's operating-system software for a PDA it plans. Nokia and Qualcomm license Palm software, too, hoping to make their phones smarter. As markets for PDAs, cell phones, and pagers converge, little Handspring will have to take on these giants as well as Palm.
For investors, though, the biggest danger may be other investors. Consider what happened when Palm's parent, 3Com, sold some shares at 38 in March. The stock leaped to 165, momentarily giving Palm a market value higher than Walt Disney's. It traded recently at 29 1/2.
Given the Visor's popularity, another mania may break out. What's a share in Handspring really worth? For my money, I'd just look at how Handspring was valued in April, when it issued options to two new directors at what it called fair market value: $13.33 a share (table). Easily tradable public shares deserve a higher value. A price of 18 seems plenty high enough.
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