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Smartphone Makers Diverge Ahead of Earnings

June 23, 2008


SmartMoney.com
By Dan Burrows

Apple's (AAPL) new iPhone 3G has been garnering so much attention it's almost easy to forget that a couple of other smartphone companies are reporting earnings this week. BlackBerry-maker Research In Motion (RIMM) posts first-quarter results after the market closes on Wednesday, while struggling Palm (PALM) will announce fourth-quarter numbers about 24 hours later.

It looks to be the tale of two smartphone makers -- the best of times for RIM and the worst of times for Palm. The former is likely to ring up another beat-and-raise quarter; the latter will post another loss.

Picking up shares of any company ahead of earnings is usually best left to the pros and active traders, but we have to admit that RIM, even at all-time highs, still looks pretty compelling. As for Palm, we've been burned by this ongoing turnaround story before.

Apple's smartphone may be getting all the glory but it's not as if RIM has been standing still. There's been plenty of hand-wringing over the second coming of the iPhone and what it will do to BlackBerry market share. We expect the iPhone 3G to be a huge hit with consumers and even pick up some corporate users, but it's hardly a death sentence for RIM.

The company's done an admirable job expanding its appeal outside of the workplace, wooing consumers with models like the Curve and Pearl. The upcoming Bold and touchscreen Thunderbird should only serve to feed the CrackBerry habit.

And as for the iPhone making inroads among enterprise customers, that's more likely to come at the expense of Palm. A May survey of companies planning to purchase smartphones next quarter revealed that more than 80% of them will buy BlackBerrys, according to ChangeWave Research. Apple came in second with 13%. As for poor Palm, only about 8% of those surveyed planned to buy one of its smartphones.

It's no wonder analysts expect RIM's first-quarter earnings per share and revenue to more than double year over year. True, the stock fetches 27 times forward earnings, so it's not exactly a screaming bargain. On the other hand, that's more than reasonable if RIM can hit analysts' long-term projected growth rate of nearly 35%.

Palm, unfortunately, is another matter. The good news is that the company finally has a hit with its Centro smartphone. Even better, Palm just announced a deal to offer it through Verizon Wireless, a joint venture of Verizon (VZ) and Vodafone (VOD), making it available on the Big Three carriers. (It was already offered by AT&T's (T) AT&T Wireless and Sprint (S).)

Then there's the bad news: The Centro is cheap, and thus comes with lower margins. It also doesn't help that it's cannibalizing sales of Palm's more profitable Treo lineup. Analysts expect the company to swing to a quarterly loss – its fourth net loss in a row. The Street figures it'll post red ink for all of fiscal 2009, too.

It's not that Palm is definitely, irretrievably broken. It's just that any turnaround is predicated on a couple of key developments – and neither is coming soon. For one, Palm's got to finish its new operating system, something it's not expected to do until the end of this year at the earliest. And then of course the company needs to come up with some sexy, sleek designs if it wants to compete with the BlackBerrys and iPhones of this world. Even the Centro, which is tiny by Palm standards, is still comparatively chunky.

With RIM and Apple squeezing Palm on two fronts, time is a luxury the company doesn't have. Palm's shares could always rally by beating low expectations, but there's not much to like in the fundamentals and there likely won't be for a good while.

The smartphone market is growing so rapidly that RIM should continue to thrive despite the iPhone onslaught. As for Palm, perhaps we'll look back upon this week's earnings report as the low point in its turnaround. Even so, we wouldn't put our money where our mouth is based on that possibility.

SmartMoney.com