Slashed Prices and Bleeding Margins Wound Handspring's Stock

The handheld maker's shares have lost nearly a third of their value in less than a week.
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If only Handspring (HAND) could release a product and distract the vultures!

On Aug. 19, Handspring announced a $100 price cut on its Visor Edge, a slim handheld released in March with a price now comparable to the older Palm Vx at $299. Investors paused, thought hard, paused again and after two days of silence, the stock started a slide Wednesday that erased 32% of its value through the close of trading Aug. 27.

Some say the erosion comes from the price cut, arguing it was a telltale sign the Visor Edge can't compete against the newer Palm m500 family of PDAs or the color-screened Sony Clie. Handspring saw its margins fall sequentially from 31.8% to 13% in the June quarter, and such deep discounts on the Visor Edge may mean Handspring has given up hope of keeping the price up in lieu of moving product.

UBS Warburg analyst Bill Crawford forecasts that Handspring's margins will dip below 10% in the current quarter. "That's relatively temporary. I see them going back into the 20% range later in the year," Crawford says. Crawford has had an investment banking relationship with Handspring.

It's been a tough year with the one-two punch of an economic slowdown and competitor Palm's inventory error that led it to stock up on handheld components into the deceleration. As a result, Palm was forced to slash prices to move product cheaply and put as many components as possible to use.

Handspring answered with its own price cuts, as well as a $26.8 million charge for backed-up inventory of its own, compounded by the cost of paying the retail channel for "price protection," giving retailers cash to keep the products moving. Add to all those negatives the impure thoughts of the former Palm fans about the future of the Palm operating system and Palm OS-based Handspring looks riskier than ever.

"People are going into anything somewhat defensive," says CIBC World Markets analyst Tom Sepenzis of August's investor sentiment. "Handspring is not proven, it's not a conservative play. Investors want to preserve capital when the market's not behaving. They're thinking September is going to be, hopefully, the worst quarter. Then they'll scale back into

Handspring hoping for Christmas sales and a key integrated wireless device." Sepenzis rattled off a list of potential threats to Handspring, from the high-end dominance of the Compaq iPaq and its appeal to the corporate customer to the upcoming arrival of PocketPC-based devices with mobile calling capability from

Mitsubishi Electric

,

Sendo

and

Alcatel

(ALA)

. Sepenzis' company has done no investment banking for Handspring.

The madness never ends!

Perhaps Handspring will have its anticipated fall-release product out before or during the Cellular Telecommunications and Internet Association conference in mid-September, given that handheld makers usually release new models at the showcase. Handspring impressed the Street in the past with snazzy gadgets from an impressive management braintrust. Investors need a reason to believe.