After this past week’s news it would appear that investors may be thinking of M.C. Hammer’s famous song, “Can’t Touch This”, when evaluating Palm [PALM] and Blockbuster [BBI].  Actually, Palm and Blockbuster could very well be on their way to filing for bankruptcy as the once famous rap star did in 1996.

Image from www.boston.com

Palm and Blockbuster have both been in business for awhile now.  I once owned a Palm V from back in the days and I also once had a Blockbuster membership.  Needless to say, it has been many years now since I have made a purchase from either company.

The problem both companies face is a waning demand for their goods and services.  For example, Palm sold 810,000 units during the quarter when the Palm Pre was initially released.  The following quarter though, demand fell by 30% and only 573,000 units were sold.  For the most recent quarter, sales fell by nearly 50% from the initial quarter to 408,000 units.  Now compare these numbers to Apple’s latest quarter in which it sold 6.9 million iPhones.  This number is larger than the total of all previous quarters combined!  So it’s quite clear that smart phones are selling, but just not Palm’s.  Now I’m not here to debate the merits of WebOS (Palm’s mobile operating system technology) or the Palm Pre’s specifications, but it would appear that with over 80 times the amount of applications available for the iPhone (approximately 160,000 vs. 2,000 for Palm), it’s a tough sell to convince someone to buy a Palm smart phone over an iPhone.  And while there are takeout rumors surfacing, I believe that with the current levels of debt Palm has, any chance of a takeover will be for far less than where the stock currently trades.  I also don’t think Palm will be able to move towards a pure licensing model for WebOS especially when Google is giving away its mobile operating system technology, Android, for free.

As for Blockbuster, the situation is just as dire.  Somehow the stock rallied on Friday because its CEO John Keyes made an announcement to the Dallas Morning Journal that the company’s situation hasn’t changed much over the past year.  I suppose this may be true in that the company is continuing to expand online and mail subscription offerings and putting up more kiosks in supermarkets across the country,  but the growth for these services continues to be costly for the company as it cannibalizes its store revenues.  The company now also has a crushing $1 billion debt load and continues operating at a loss despite not counting non-recurring charges.  Also, with more set top boxes, televisions with built-in wifi connections, and online streaming services being provided by technology startups and cable companies, it will be difficult for Blockbuster to grow its customer base.  It’s not a pretty picture.

In summary, while Palm and Blockbuster may appear attractive as a speculative stock at their current price levels, I don’t see any news on the horizon that would positively impact their prospects.  The stocks of both companies are overvalued even at their current levels.  I would instead be more comfortable recommending iGo [IGOI] or Ruth’s Chris [RUTH] as discussed in previous posts.

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1. Mr. Nice Geek » Palm Gives Me The Hand — April 12, 2010 @ 9:39 PM

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