Reading into Palm's future

Expectations are high for the smartphone maker's new Pre, but it's not easy to separate the hope from the hype.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By Michael V. Copeland, senior writer

A lot is riding on the Pre, which is scheduled to hit the market this summer.
What progress is the Obama administration making toward ending the recession?
  • It's succeeding
  • The recovery is too slow
  • It's not helping at all

SAN FRANCISCO (Fortune) -- Palm, which invented the smartphone, is on a roll, but not with anything it sells today.

Earlier in March, The Sunnyvale, Calif.-based company pre-announced that fiscal third-quarter sales of its Treo and other handsets would total between $85 million and $90 million, far below the Street's consensus estimate of $156 million.

So why did Palm's (PALM) stock rise 35% over the last seven trading days? (This is a volatile stock - shares took a hit on Monday, but came back on Tuesday.)

Because of the phones it has yet to sell: the Palm Pre, slated to hit the market go on sale by the end of June, and presumably the other devices that will run Palm's shiny new webOS operating system.

In many ways, Palm stock is behaving like shares of a classic biotechnology company with a promising drug in trials: Everything is riding on potential performance and sales.

The biotech's stock marches higher before a drug actually hits the market. But once it does, the shares frequently slide back, as drug sales fail to meet their hype - or sometimes even when they do. Once sales numbers are on the books, projecting earnings growth becomes more precise, and the optimism that can buoy a biotech company with drugs in the development stage gives way to a more sober reality.

Palm is very much in that development stage. It is benefiting from the successful "trials" its Pre phone and webOS have so far undergone, most notably at the Pre's launch at January's Consumer Electronics Show.

Palm gave an update on the whole ball of wax last week, which didn't really add anything other than the phone will fall under Sprint's existing pricing plans. But more details may come out when Palm reports its earning after the market closes Thursday.

The company also raised an additional $84 million in cash through a public offering, and had to temper the too-exuberant claims about the technology that its largest investor, Elevation Capital's Roger McNamee, made during an interview with Bloomberg (McNamee has never been one to downplay his investments, so no one should be surprised)

In short, Palm emerged this week with a good story to sell the Street. It's a company that looks like it now has the cash to survive long enough to properly market Pre, and extend its webOS into other devices. In other-words, it's got potential.

RBC Capital's Mike Abramsky upgraded Palm's stock on Friday to "outperform" from "sector perform," and raised his target price to $12 from $5. "Rather than a one product Hail Mary, we see webOS as a platform, spawning a family of devices addressing a broader market opportunity," he wrote in a client note.

Abramsky also raised the specter of Palm being an acquisition target by the likes of Research in Motion, Microsoft, Dell, Hewlett-Packard and others with a takeout price of $15 to $16 per share. Analysts from Piper Jaffrey and Deutsche Securities have also upgraded Palm shares to a "buy" in recent weeks.

Sounds great, but all the frothy projections are predicated on Palm pulling Pre off. The upside hinges on the company's ability to bring the smartphone to market on time, at scale, and that it performs not just adequately, but outperforms everything on the market including the best from Apple and RIM - no small order.

While Palm is taking pains to temper the hype, McNamee and other investors are setting up some high expectations. The stock is rising on optimism and best guesses (and McNamee's may be better than most). But until the Pre and Palms webOS hit the market sometime before the end of June, that's all it is. To top of page

Company Price Change % Change
Apple Inc 100.50 -0.03 -0.03%
Bank of America Corp... 15.47 0.02 0.12%
Staples Inc 11.32 -0.30 -2.54%
General Electric Co 26.29 0.24 0.92%
Facebook Inc 74.92 -0.37 -0.49%
Data as of 11:14am ET
Index Last Change % Change
Dow 16,950.64 31.05 0.18%
Nasdaq 4,526.45 -1.06 -0.02%
S&P 500 1,983.61 2.01 0.10%
Treasuries 2.42 0.01 0.50%
Data as of 11:29am ET
More Galleries
The world's most popular beer is ... Few people outside China have ever tasted the top-selling brew in the world. More
Transformations on the street On his days off, stylist Mark Bustos gives free haircuts to the homeless. Here are some of the transformations. More
13 amazing things you can make with a 3-D printer From the wacky to the sexy to the yummy, here are some of the most surprising things you can make with at 3-D printer. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.