Games and Gadgets

Return to Article

RIM Gets a Prudence Payoff

Troy Wolverton

When Research In Motion and Palm (PALM) reported their quarterly results on Thursday, they had lot of similar things to say.

The two companies, which each essentially offer enhanced cell phones, both posted better-than-expected numbers for the latest quarter. And they both posted strong gains of new customers.

Both companies have come under intense scrutiny in recent months and have seen their stocks slide as a result. Potentially feeding into investor skepticism, both companies warned Thursday of potentially disappointing results in the next quarter.

However, they both projected results will pick up in subsequent quarters as they rollout new products.

Despite all the similarities, the market's verdict was anything but similar. In recent trading on Friday, shares of RIM were up about 5%, while Palm's stock was off nearly 12%.

To be sure, there were some differences in their reports. While RIM's current-quarter guidance range was only slightly under the Street's consensus at its midpoints, Palm's fell far shy on both the top and bottom lines. Still, Palm offered a fairly specific forecast for its full year that was above expectations, while RIM didn't offer any kind of numeric outlook for coming periods, simply offering qualitative assurances that its business was "going great."

But the difference seemed to be in how investors and analysts interpreted the companies' expectations. RIM was given a pass for prudently underpromising, while analysts argued that Palm's report raised questions about whether it really could meet its bullish outlook in coming periods.

RIM's management is "deliberately being very conservative," says Chyanne Fickes, a portfolio manager with Stone Asset Management, which is long RIM. Given the recent market selloff of tech and other stocks, "clearly there's no upside for any company to promise anything that don't know they can absolutely deliver."

Palm's management argued that it was simply doing the same thing by offering a disappointing near-term outlook. But analysts noted that some of the causes for the disappointing guidance could plague the company longer term.

Palm chalked up the disappointing near-term guidance in part to plans to discontinue sales of its Treo smartphones in Europe due to new environmental regulations there. Meanwhile, the company said that enterprise customers are taking longer than expected to adopt its new smartphone that runs on Microsoft's (MSFT) Windows Mobile operating system.

Palm's execution problems were coming at a dangerous time, analysts noted. In the U.S., which is where Palm gets the bulk of its sales, the company's Windows Mobile phone could face strong competition from Motorola's Q phone. And in Europe, Nokia (NOK) and Samsung are ramping up sales of their own smartphones right when Palm won't have anything to offer customers.

"We believe that competitive concerns are likely to linger over Palm for the next several quarters until the company is able to demonstrate that the recent uptick in sell-through is sustainable in the face of increased competition," wrote James Faucette, an analyst with Pacific Crest Securities, in a research note on Friday. Pacific Crest has not done recent investment banking business for Palm.

What's interesting is the degree to which those competitive concerns are weighing on Palm rather than RIM, when both companies face threats from the same big players.

Competition is clearly an issue for RIM and, because of the stock's volatility, it's not necessarily a great long-term play, acknowledges Fickes. But even with the rise on Friday, the stock is trading at about 22 times current year earnings estimates, giving it a price-to-earnings-to growth [PEG] ratio of less than one.

Even if the company's guidance now implies that it will grow at 27% this year instead of 30%, at its current price, it still looks like a bargain, argues Fickes.

"There's not a lot out there that's selling ... below [RIM's] PEG," notes Fickes.

But a similar case based on valuation could be made for Palm, especially after Friday selloff. The company's shares are trading at just 16 times current year earnings, giving it a PEG ratio of about 1 if you factor give it just a 15% annual growth rate.

But Palm didn't get the benefit of the doubt on Friday, no matter how similar its report might have been to RIM's.