Phone.com’s Wireless Bet; EA’s Got Game

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Phone.com (PHCM)

Jim: By sheer coincidence, both our companies today are based in Redwood City, Calif., in the Silicon Valley area.

Mike: Yeah, along with about 30,000 others.

Jim: We’ll start with Phone.com. Now, Mike, you’ve been bugging me for weeks to review Phone.com. What gives?

Mike: I can see by the look on your face that you think you’ve got my number, that you think I’m wild about this stock.

Jim: I’m just listening, my friend.

Mike: Well, first I have to make a disclosure. Phone.com is one of the top five holdings in a mutual fund I’m invested in.

Jim: I’ll skip the dangling preposition and ask: Which one?

Mike: Janus Venture Fund, which only doubled in value last year, thanks in good part to Phone.com, which rose 1,400%.

Jim: For those of you without calculators taped to your wrists, that’s fifteenfold. And I can see why. This company has a compelling concept, which is basically providing the software that enables you to get the Internet on your wireless telephone. Correct?

Mike: Right. Now, as many know, the term “wireless” became the mantra of choice in high-tech investing late last year. The stocks just soared, and equipment pro-viders, including Phone.com, soared along with them. Then the sector more or less topped out. Since then, Phone.com’s stock chart has looked like a radio wave--up and down, up and down. The stock peaked at $168 a share in December and now trades around $137.

Jim: Phone.com is still a pipsqueak company, but it’s growing fast. In the six months ended Dec. 31, its sales totaled $21 million, up from just $3 million a year earlier. But, of course, it’s not turning a dime of profit.

Mike: Of course not, because it’s plowing all its cash back into building the business.

Jim: Like investors care. The stock’s total market value is $9 billion. Incredible.

Mike: Gee, that’s sort of in the junior league of Internet stocks, no?

Jim: Let’s cut to the chase here. I can tell you like this stock. But I’d pass.

Mike: I figured that. But look, every tech stock these days is a “story” stock--you’re buying the story, or you’re not, more than you’re buying the numbers. Nothing exemplifies this more than Phone.com.

Jim: In other words, it doesn’t matter if the company is a tiny money-losing outfit. It’s got a great story--so buy it?

Mike: If this was a normal company, you’d take it out back and shoot it because the numbers indicate everything is going in the wrong direction, except revenue. But look at the business. It’s an article of faith that wireless transmission of data is going to be huge, and that’s why companies such as Phone.com are so hot.

Jim: Let me jump in with a pragmatic question.

Mike: Pragmatic! How dare you! We’re talking about a high-tech stock here.

Jim: Spare me. My question is, are people really going to want the Internet on those tiny little screens of their wireless phones, which only get smaller every week?

Mike: We’re not talking about you sitting down and Web surfing.

Jim: What are we talking about, then?

Mike: About getting e-mail, alerts, stock prices and having all sorts of data at your fingertips. Then there are other wireless devices that can receive Internet-based stuff. It won’t be your portable telephone, but it might be something you can carry around with full color capability.

Jim: Let’s just hope it’s not as big as an Iridium phone. Look where Iridium ended up.

Mike: No, Iridium is tomorrow’s doorstop. I’m talking about things that look more like a Palm Pilot, or even a regular cell phone with a big screen. So, if we accept the idea that wireless is in our future, Phone.com’s stock is going to come back. And if you fancy a flutter, this is a reasonable stock to flutter on.

Jim: I’m the first to admit that I’ve passed on what I thought were exorbitantly priced stocks, only to see them rise further. But I’m sorry, even with its decline since December, I see Phone.com as way overpriced in terms of its size or prospects.

*

Electronic Arts (ERTS)

Mike: Now here’s a company that really deserves credit for being a rarity.

Jim: How so?

Mike: Not only has Electronic Arts existed in Silicon Valley for almost 20 years, but it existed for nine years before it had an IPO, or initial public stock offering.

Jim: That’s not a rarity, that’s a downright miracle.

Mike: I know. Today it’s hard to find a tech company that lasts nine minutes before it has an IPO.

Jim: Now, you have children, Mike, so I suspect Electronic Arts is squarely established in your household. It’s a leading maker of the video games that go into the Sony and Nintendo game players, along with personal computers, of course.

Mike: In fact, Electronic Arts probably makes the lion’s share of the video games that, along with the rest of the game industry, do battle with real intellectual stimulation in my house. You know: Can you get the kids to turn off “The Legend of Zelda” so they can read “The Prisoner of Zenda” instead?

Jim: Electronic Arts makes such familiar titles as “Madden NFL,” “NASCAR Road Racing” and “SimCity.” The list goes on and on, and its annual sales for its last fiscal year were about $1.2 billion. This is a well-established industry leader.

Mike: In an industry, by the way, where leaders get picked off quite frequently. It’s not easy having a long record of successful games.

Jim: That’s true. And like Phone.com, Electronic Arts’ stock has dropped well below its recent high--this stock hit $121 in December and is now around $90.

Mike: I can put my finger on one of the main problems. EA, like the entire gaming industry, is going through that horrible and recurrent doldrums known as a technology transition.

Jim: Which, in English, means?

Mike: Today you have your Sony PlayStation. Tomorrow you’re going to have PlayStation II. You have your Nintendo 64 today. Tomorrow you’re going to have something like Nintendo 128. In other words, the machine makers are about to introduce more powerful models. And while everybody awaits the new machines, they stop buying games for the old ones.

Jim: Plus, companies such as Electronic Arts have to start spending gobs of cash to develop new games for the upcoming models. Less money in, more money out.

Mike: But in the long run, this all helps investors.

Jim: So we are on the same track! I’d buy this stock, in part because of what happened in December. That’s when Electronic Arts said those transition snags would make for a disappointing December quarter. The stock plunged 26% that day alone.

Mike: And created a wonderful buying opportunity.

Jim: Exactly. Now, having said all that, it does bother me that Electronic Arts is betting much of its future on the Internet.

Mike: What’s wrong with that?

Jim: For one thing, I wonder whether there’s going to be enough demand for people to play games online that they now play on consoles.

Mike: That online business will be huge.

Jim: You think so?

Mike: Sure. Look, soon enough the online versions will resemble the console players’. Web sites probably won’t be exactly the same, simply because it’s easier to build a console that’s devoted only to game-playing than a machine that does 40 things equally well. But the graphics will get better, as will some of the other features.

Jim: They’d better. I mean, the reason Sony and the others keep developing new players is game players can get bored very fast.

Mike: I know. But certainly as broadband--meaning high-speed, high-capacity Internet connections--infiltrates more homes, the experience will improve. But more than that, using an online platform vastly increases the accessibility of these games and the multiplayer experience. That’s why EA recently inked a big deal to be on America Online’s site.

Jim: But what about this other problem? Word is that, when you play a game online, the reaction time to your moves is slower than on a console.

Mike: Sure, but there are compensations, like interactions with other human beings. And technologies are improving.

Jim: Well, the stock has had a pretty good track record--in the last five years, it has handily outperformed the general market by nearly quadrupling in price. It’s trading for about 49 times its expected earnings for its fiscal year ending next month, which I don’t find terribly expensive given its position in this business.

Mike: I guess for you, sticker shock is a thing of the past.

Jim: Not always--go back to my thoughts on Phone.com. But EA has some of the great titles, and it has shown before its ability to evolve in tandem with changes in the game consoles. So I’d buy this stock.

Mike: Me too.

*

Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes .com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

Jim: Don’t Buy

Mike: Buy

Electronic Arts

Friday: $90.50

Phone.com

Friday: $137.62