Sprint, Palm: Can One Device Save Two Companies?

The Palm (PALM) Pre launch is the biggest product launch from Palm in years perhaps ever, and there are two companies hanging their hopes on this phone as both Sprint and Palm have seen their stock prices plummet to multi-year lows recently. The Palm Pre will go head to head against the huge success of the Apple (AAPL) iPhone for consumers attention and to-date the Pre has not backed down from the comparisons, in fact they have encouraged them. In March, we wrote (The Desperate Palm Pre-scription) about major Palm investor Roger McNamee, managing director at Elevation Partners, who ranted on Bloomberg television about the fact that the Pre was going to steal all of the iPhone users away. Whether he truly believed that or was just creating hype, it seems that the anticipation for the device is higher than any other supposed “iPhone killer” to date. On Monday afternoon, Palm and its exclusive carrier Sprint (S) announced that customers will finally be able to purchase the Pre on June 6th, just days before Apple’s conference to talk about their new operating system and possibly announce a new phone.

Other key details were also released, such as the price of the Pre will be about $199 after a mail in rebate and locking in a two year service agreement. The price point again puts it in direct competition with Apple and other premier smart phone maker Research in Motion (RIMM). Any higher than that and consumers would be turned off, but any lower it cuts into Palm’s margins that they so desperately needs. Palm has been burning through cash as its stock pile of cash has been cut in half in the last year alone from $262 million to $131 million as off the quarter ended February 2009. With only one quarter left in fiscal 2009, the company is expected to lose another $.63 cents for the quarter, bringing the total for the year to a loss of $2.36. Clearly, with the release of this game-changing device Palm hopes that it can start to generate cash flows instead of hemorrhaging them each quarter. Even so, it would have to be an unbelievably successful first year for the Pre in order for Palm to be able to record a profit in fiscal 2010.

The buzz surrounding this phone is significant, and perhaps it is because consumers have shown they want another option in the smart phone market. However, it is also has the added intrigue of an all-in bet at the final table in a poker tournament. If this release is a flop, both companies will take years to recover from the blow. The Pre could become just as popular as the iPhone and perhaps more so, which would go a long way to restoring both Sprint and Palm to the elite status within their fields. Now, if the Pre is marginally successful both Palm and Sprint could survive. But with the smart phone industry being stretched to include competition from heavy hitters like Google, Microsoft, even Garmin in an already crowded space, it is clear June 6th and the months following will be absolutely huge for both sponsors.

Traders will undoubtedly try to gauge the reception the Pre receives and volume could be heavier than normal in the days leading up to and following the release. As for Ockham, we believe Palm is Fairly Valued at the current price level, and after the recent run-up we are not recommending the shares.

Can One Device Save Two Companies?

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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