Economic, Corporate Tech-Spending Slowdown Weaken Handhelds' Grip

A rash of negative news has befallen the heavyweights of the handheld computing arena in the past couple of days, underscoring concerns that the slowing economy will take its toll on this sector too.

After all, there's no reason that economic weakness and a technology spending slowdown by corporations shouldn't affect Palm (PALM), Handspring (HAND) and Research in Motion (RIMM). Should the weakness be prolonged, these three stocks, already down anywhere from 79% to 83% from their 52-week highs, could well fall further.

Some analysts are recognizing that possibility, with Lehman Brothers slashing its forecast on Tuesday for Palm and Handspring's 12-month price targets, and U.S. Bancorp Piper Jaffray severely reducing nine-month price targets for Handspring and RIM a day earlier and downgrading both stocks.

The cuts are stunning in their magnitude. Lehman's new price target for Palm is $25, down from $60. Its price target for Handspring is now $28, down from $90, while U.S. Bancorp Piper Jaffray is projecting $32, down from $110. Its RIM target is now $45, down from $150.

Slippery Hands The stocks of handheld computer makers have sunk this year

More pessimistic about Palm's prospects, Lehman also cut Palm numbers, including next quarter's revenue and this year's revenue and earnings-per-share projections. And U.S. Bancorp cut next quarter's and next year's revenue and EPS estimates for Handspring, as well as next year's revenue and EPS estimates for RIM.

At issue is the economy, stupid.

In February, sales of handhelds fell 3.7% from January, to 164,922 units from 171,181, according to market research firm PC Data. "Although some of this slowdown can be attributed to normal seasonal slowdown and to the fact that February is a shorter month, we believe that the slowdown in sales likely indicates market softness and declining consumer confidence in light of unfavorable conditions in the U.S. economy," writes Sam May of U.S. Bancorp in his report. (His firm has participated in underwriting for Handspring and RIM.)

At the same time, RIM, maker of the addictive BlackBerry pager, will get hit by the corporate IT spending slowdown. RIM's market is almost entirely corporations, the very same corporations that are cutting back on their costs.

Depending on how long the economic slowdown lasts and how much it spreads to the rest of the world, Palm and Handspring price targets could go even lower, notes Joseph To of Lehman. (He rates both Palm and Handspring strong buys, and his firm hasn't done underwriting for either company.)

Never mind the worries investors already have about these companies, including increased competition for Palm, which currently sells more handheld devices than anyone else. And there's always the fear that high valuations bring.

There is, however, hope that newer, more expensive and more expansive products from Palm and Handspring, as well as new features on RIM pagers will increase both average selling prices and gross margins.

For now, neither analyst is forecasting an earnings or revenue shortfall for this quarter, but stay tuned. All three companies will report their current quarters in the next month, and investors hope they'll all offer some guidance.

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