Palm's Stock Soars on First Day, While 3Com Dives

Updated from 12:46 p.m. EST

Handheld electronic organizers are clearly the rage, but even that enthusiasm did not keep investors from quickly cashing in their profits Thursday as Palm(PALM Quote) made its stock market debut.

Shares of Palm, the dominant maker of electronic organizers, more than quadrupled after much pomp and circumstance that preceded the company's initial public offering, but they drifted back toward the earth in late trading.

Priced at $38 a share, Palm opened at 145 and quickly ran up to 165. But the stock later retreated, closing up 57 1/16 at 95 1/16.

Analysts said Palm's late softness could be a result of the day's decline in the overall Nasdaq stock market or a sign that the IPO market is cooling. Palm's 150% gain for the day was impressive but less opulent than such IPO predecessors as Avenue A (AVEA Quote)and net.Genesis(NTGX Quote).

The surge in Palm's stock gives it a market capitalization of $54.2 billion, nearly twice the stock market value of 3Com(COMS Quote), its parent company.

While Palm's underwriters could declare a lucrative victory, 3Com's investors were looking for a consolation drink after their stock suffered its largest drop in more than a year. Shares of 3Com fell 22 5/16, or 21.4%, to close at 81 13/16. The stock had run up more than 40% this week in anticipation of the Palm offering.

The trading volume of Palm and 3Com accounted for about 7% of all Nasdaq shares traded on Thursday.

Investors embraced the forecasts for the growth of the emerging technology. For example, research firm IDC predicted the market for hand-held devices like the Palm Pilot will grow at a compound annual clip of 77%, with 21.5 million devices in consumers' hands by 2003.

Even Palm's initial offering price was more than double the original $14 to $16 range, making it the most expensive IPO on a per-share basis so far this year.

Palm offered 23 million shares and brought in $874 million under the guidance of lead underwriter Goldman Sachs.

Before the stock had come to market, Palm had earned a buy rating and a $90 price target from ABN Amro, a firm that did not underwrite the offering. The firm's analyst, Jonathan Ross, said Palm should garner a significant portion of the market for hand-held computers.

Chris Sessing, an analyst at Crowell Weedon, noted that Palm already has about 70% of the market for hand-held devices.

"PDA's (personal digital assistants) have proved themselves, and Palm is the leading one," said Mark Desautels, president and chief executive officer of the Wireless Data Forum, a trade association. "Palm provides a terrific platform for realizing the opportunity of the wireless platform."

But there is a growing field of competitors lining up against Palm, including Windows CE devices, two-way pagers and so-called smart phones, enabled for the Internet.

Last month, Palm made an aggressive move to retain market share by lowering prices by 16%, according to PC Magazine. This move will affect Palm's revenue growth and earnings in the short term but puts pressure on the generally cheaper, but comparable, alternatives from Handspring.

Some of the same crew that made the original Palm Pilot abandoned 3Com to found its competitor, Handspring, in 1998. Now, Handspring has gained a foothold in the market with its Visor and Visor Deluxe handheld devices.

"Palm is dominant now but they're not going to be dominant forever," said Paban Raj Pandey, an analyst at the Otiva research firm who edits TechPulse newsletter. "The smart phones and Handspring will take some market share away from them."

Palm should expect more friction from Microsoft when it introduces its newest CE device. "Microsoft is expected to release shortly a new pocket PC," said Michael Miller editor in chief of PC Magazine, who has tested every Palm device. "Windows CE does more things and runs on a wider variety of platforms."

Miller said that while it was too early to tell about Handspring, "they seem to be doing very well." Miller also notes that Handspring doesn't have a wide variety of options as Palm does.

"There's the whole line of CE devices, and the fact that they have color screens makes them more of a competitor," Desautels of the Wireless Data Forum said. "CE is fighting an uphill battle but it could be a significant competitor."