The Deal with DROID

In my last post, I talked about Motorola's attempted resurgence with the new line of Android based phones known as the DROID. My thoughts were that the DROID would be the first and crucial step in Motorola finally returning to being a serious player in the handset market. I recommended MOT on the basis that the stock price/sales ratio is much cheaper than the industry, and, should the DROID be successful, the stock could easily move up to be comparable to its peers.

Well, the numbers are in! As John Paczkowski mentions in his article, there were 100,000 DROIDS sold during the launch weekend. Respectable numbers for a company that hasn't had a hit in a long time. However, there are some concerns I have about the future of the DROID. During the launch weekend, my brother-in-law and I made a trip to a local Verizon store to check out the DROID. He is out of contract with Verizon and, as a professional in the banking industry, is a perfect candidate for the DROID. I wanted to see the phone in person as well as talk to the store manager about traffic he's seen in an effort to gain insights on if my stock recommendation was accurate. Here's a few tidbits:

1. According to the store manager, traffic was fairly quiet that weekend. I initially treated that as a negative for the DROID's prospects, but now it looks like that anecdotal data was an anomaly.
   
2. The DROID itself was very heavy. Significantly heavier than the iPhone. My brother-in-law saw that as the biggest weakness for the phone, but not a deal breaker.

Unfortunately we weren't able to turn the phone on (something about it not being activate and the menu being locked out). Since user interface is a huge compenent of the phone's quality we had to leave with only half the picture. However, my brother-in-law left being somewhat uncertain about the phone.

So the first experience with the DROID caused me to take pause on my recommendation and re-evaluate - something I recommend any investor to do, especially for riskier investments like MOT.

But then my brother-in-law sent me this. You can basically get the DROID 35% off if you sign a 2 year contract extension with VZN. This type of discounting so early in the products launch really caused me to take pause. If the DROID was doing really well, Verizon would have the pricing power to not offer these kinds of promotions...at elast for a while.

So, with all this information processed, my updated reommendation is a more cautious one for MOT. Yes the DROID has been selling well. It's launch weekend did fairly well. But there are indications that sales may drop of dramatically post-launch weekend. The stock closed on Friday at $8.78/share. I think that still gives the company fairly cheap valuation for a company that has a phone that's doing well. I would reccomend watching the DROID numbers very very closely during the holiday season. If this type of discounting continues and the sales are harder to keep up, then I would consider selling. At the very least, a close trailing stop should be applied to any positions to protect against potential bad news (I'd say around $8.50).

The DROID is an interesting phone and still has the potential of saving MOT's handset division. The company has already stated it wants to spin-off the unit, but it needs to be financially viable for it to do so. Hopefully the DROID sales can keep up and these indications I've been seeing are wrong. But there's no reason for everyday investors to get caught off-guard if the indications are right after all.


Questions/Comments/Feedback?
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The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.