Does Palm Deserve Its Tenfold Rise? (PALM, AAPL, RIMM)

Palm, Inc. (NASDAQ: PALM) has been on a tear of late.  It was just Monday that shares were hitting fresh 52-week highs and that was after being one of last week’s winners on a down week.  The whole run is based upon the June 6 launch of the Palm Pre on the Sprint network.  Maybe the lows were way too low when they were happening, but this stock has literally gone up 1,000% from those levels.  Then throw in the solid competition from Apple Inc. (NASDAQ: AAPL) for the iPhone and Research in Motion (NASDAQ: RIMM) for the Blackberry.

It was early in December when Palm was a miserably failing smartphone player that had multiple rounds of disappointing sales of the Palm Treo.  Muchof the problems was because of  the economy, but the issue that is puzzling is that you could get into your Treo smartphone for $100.00 or under.  At that time, things were so bad that shares hit $1.14.  Shares closed at $11.68 yesterday, hence the tenfold rise.

It was not until the company debuted its Palm Pre smartphone that some excitement started coming back.  This was widely anticipated, but the company had to retract insider claims of its speed, functionality, and capabilities.

We have recently seen Palm exercise its right to re-market approximately 18.5 million common shares underlying 49% of the units of Series C preferred stock and warrants which were acquired by Elevation Partners in January 2009.  Its capital raise did give the company a larger cushion for its launch of the Pre smartphone.

The problem is the company’s history.  Palm should by all right be the supreme leader in handheld devices.  This company had a shoe-in lead in the field and a large jump on the competition dating back to the 1990’s.  But what has occurred is a series of missteps and competitors took the lead.

We will not have a fresh balance sheet for another few weeks, but this is what the focus may need to be on.  Despite the recent upgrades, we still show a wide loss expected all the way out to Fiscal-2010 (May) despite an expectation that revenues will rise more than 80% next year to some $1.35 billion.

Everything is riding on the Pre for Palm and its shareholders.  We already saw a downgrade this morning as Needham cut its rating to “Underperform” based on what may be unrealistic expectations of the Pre launch.

Palm has proven again that it can run its stock.  Now the company has to prove that it can go recapture market share and re-establish itself as an industry leader.  Over the next 45 days or so, the company will have to deliver on the hype and prove that it can once again command consumers to its phone.  If not, then the stocks future is one of limbo or disappointment.  There is a reason that this was one of our top tech disappointments of the last decade, and the risks are truly there that Palm could become one of the brands that may disappear.  As always, that is not certain.  There is just a lesson of history here that is extremely difficult to forget about.

Shares are down 1.5% at $11.50 this morning, and the 52-week trading range is $1.14 to $12.17.

JON C. OGG
MAY 20, 2009