Update: Smart Phone Makers Ripe for Profit Taking

Earlier this year I wrote separate pieces highlighting both Research in Motion (RIMM), maker of the Blackberry and smart phone staple, and Palm (PALM), the turnaround story trying to get their name back into the mix. In the four months or so since then both stocks have soared, nearly doubling in each case (PALM from $6 to $11 and RIMM from $44 to $78). Not surprisingly, these are instances when taking profits makes sense.

The competitive landscape for Research in Motion really hasn’t changed since February. The stock move is based on two things; the overall market advance, as well as renewed optimism that Blackberries remain popular devices and profit margins will hold up nicely even in this heightened period of competition and economic challenges. RIMM has seen its P/E ratio on 2009 earnings estimates jump from a very meager 13 times to a more reasonable 20 times, which seems more appropriate to me.

In Palm’s case, the stock has moved in anticipation of their new device, the Pre, set to debut June 6th. While the prospects remain bright for both the Pre and subsequent devices Palm is sure to launch in coming quarters, we often see a sell off in the stocks of tech companies heading into or right after major product releases (so called “buy the rumor, sell the news”). In order for Palm shares to make new highs above the recent peak of $14 $12 per share, the Pre launch really must go perfectly. However, as is the case with many new product launches, expectations are high and there can be hiccups along the way. Therefore, there will be opportunities for investors with big gains to take profits and put selling pressure on the stock.

In both of these cases, investors who have sizable gains and still believe in either or both of these companies longer term can have their cake and eat it too by taking some chips off the table and keeping a smaller position to profit from if their instincts are right about the future.

Full Disclosure: Peridot Capital was long shares of Palm at the time of writing, although the position has become smaller in recent weeks, and positions may change at any time

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5 Thoughts on “Update: Smart Phone Makers Ripe for Profit Taking

  1. Tristan on May 27, 2009 at 7:19 PM said:

    You are right on the money except that PALM hasn’t hit 14….yet.

    I have bought and sold the stock since it was at 6.59. I only wish I knew back in 12/08 what we all know now, when it was a buck.

    The stock has alot of upside not only because of the products to roll out. But, because of it’s new operating system “webOS”. This will change the smartphone industry forever.

    Still, I’m following your advice and taking some chips off the table.

    Thanks, Tristan

  2. Lately we;ve seen one OS and then one device from Palm that were about to change the world…those were Palm OS 6 and the Foleo.

    Oh wait, we didn’t actually see them.

    Well WebOS based Pre is more likely to actually start selling…but it’s more than certain it is going to be an uphill battle for Palm and, in all honesty, I still don’t know how to respond to Chad’s apparent success with them on the stock market…their fundaments have not changed, only the rumors have…Palm is yet to prove they can make solid profit.

    I am glad he’s pulling off. PALM may raise even more, but betting on that would be pure gambling.

  3. Chad Brand on May 28, 2009 at 8:15 AM said:

    Oops, you’re right Tristan. The high was $12, not $14. My bad.

  4. Chad Brand on May 28, 2009 at 8:41 AM said:

    Bobby,
    I think you’re correct to be skeptical about a single device that while pretty solid, faces good competition and has not even been released yet. The key to the stock’s move has simply been valuation. Remember, business fundamentals and stock prices do not necessarily correlate highly. Horrible companies can see their stock prices soar. All that is required is that the company is not as bad as the stock price indicates.

    Even after going from $1 to $10, Palm is still only valued at $1 billion, whereas RIM is worth $43 billion, which clearly shows which company is better positioned. The question going forward is, does that gap get smaller or larger?

  5. Well considering the market was developing, usually the winners are those who can take and then maintain their lead.

    Arguably Palm had the lead, but in reality RIM were in the mobile communication market before Palm; their positions there only increased and in my view they are one of the clear winners.

    I can’t predict how their stock will change, but it stands to reason that it would cost them less to guard their position than it would cost anyone smaller to steal a pie of their business.

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