Palm’s Shares Rocket 150% in Trading Debut

The hottest Internet Age gadget is the Palm organizer, and Palm Inc. matched the feverish expectations of investors Thursday as its stock more than doubled on its first day of trading. The surge gives the Santa Clara, Calif.-based company a market value of $53 billion, topping that of General Motors and Apple Computer.

The run-up also gives Palm nearly double the market value of its parent, 3Com Inc., a computer networking firm that still owns 94% of the maker of hand-held electronic devices.

Although Palm’s IPO had been expected to do well, its extraordinary performance shocked even 3Com, which a week ago had planned on an IPO price of $14 to $16 a share before settling on $38 on Wednesday night, a price that netted 3Com $785 million.

Then Palm’s shares hit $165 in Thursday’s trading before closing at $95.06--or more than 1,500 times the company’s profit per share.

Meanwhile, 3Com shares, which have rocketed in recent weeks, sank $22.31 to $81.81 on massive volume of 100 million shares on Nasdaq.

“There is a bit of sex appeal associated with the product,” said a disbelieving 3Com Chief Executive Eric Benhamou after ringing the opening bell Thursday on the Nasdaq stock market. “Individuals put their entire lives in these products, and they have an emotional tie to them.”

The Palm organizers store calendars, to-do lists and, in some models, give consumers wireless access to the Internet.

Part of the attraction for investors is that in four years Palm has sold 5.5 million of the easy-to-use devices, which cost between $200 and $500, representing about 70% of the electronic organizer market. And unlike many hot new tech stocks, Palm actually makes money, turning a $24-million profit on $435 million in sales in the last six months.

But even 3Com executives conceded that Palm’s stock price reflects more of an idea of the future of technology and the Internet than about what the company can realistically accomplish.

Palm “is not at all worth where the stock is going,” said analyst Rob Enderle of Giga Information Group. “It’s not a lot different than a legal form of doing pyramids: The last people in are going to be paying for the first ones.”

The bigger threat for Palm will come within a year or two from another generation of products: cellular telephones with Internet access made by companies including Nokia, Ericsson and Motorola.

If Palm’s stock does slide, analysts say, the company runs the risk of becoming a poster child for technology stock excesses such as former Internet wonder Theglobe.com, which rose a record sixfold on its first day and has since sunk to shoe-top level.

“I’m not going to attempt to defend investor sentiment,” 3Com President Bruce Claflin said. “At the moment, investors are willing to pay money to invest in the stock. Clearly, it will be volatile.”

The investor furor was fueled by other factors.

“Everyone understands that the PC has limitations,” Benhamou said. “Everyone understands that simplicity is important. And there is justifiable excitement over wireless technology.”

In the last year, Palm has also changed its top managers, its business model, its manufacturing strategy (the work was recently contracted out) and now its corporate structure.

Palm CEO Carl Yankowski came from Reebok in December, and the inventor of the Palm, formerly known as the PalmPilot, works at rival Handspring, which makes a cheaper hand-held organizer using the same Palm-licensed software.

Palm had 68% of the hand-held organizer market in the U.S. in the first half of 1999, according to International Data Co. Annual sales of hand-held devices are expected to top 7 million units by 2003.

Competing devices from computer makers Compaq, Hewlett-Packard and others that use Microsoft’s rival software, Windows CE, have a much smaller but growing share of the market.

3Com’s Benhamou said that although organizers and cell phone markets are converging, consumers will use both, especially if they are connected by low-frequency radio.

Palm is hedging its bets by licensing its software to Nokia and other cell phone makers, but it’s harder to make money on software.

By year-end, 3Com plans to spin off the rest of its Palm shares to existing 3Com stockholders.