This was supposed to be a great day for Palm (PALM) investors, the highly anticipated Pre handset was released over the weekend. There was a lot riding on the release and the results were strong with lines at Sprint (S) stores and all stores reportedly sold out. Estimates vary but almost all claim that the Pre sold more than 50,000 units in its opening weekend. However, the market has seen it differently as the stock was sent spiraling downwards as much as 11% in morning trading. Why the weakness in Palm shares after a reportedly strong sales showing?
First of all, many observers have noted that the fact that the Pre sold out of many locations so quickly is because of a lack of supply. According to Digital Daily, the Sprint flagship store in manhattan only had 200 Pres for sale. Furthermore, large stores in Boston and San Francisco had 55 and 60 respectively. Best Buys (BBY) around the country could not satisfy the crowds wanting Pres because they were only given 2 to 4 phones per store. This begs the question, did Palm purposefully restrict availability to keep the buzz strong through the upcoming weeks. The Apple (AAPL) iPhone’s first generation release was a huge success selling about 150,000 in the opening weekend, and Apple’s release had some extreme supply issues as well. However, that is about three times the number of units that has been estimated for the Pre’s opening.
There have been minor complaints about the lack of applications currently available on the Pre, but that is to be expected on a first generation phone. Overall, many reviews have been positive on the phone’s unique operating system and touch screen display with a slide-out QWERTY keyboard. Clearly the key for Palm and Sprint in the coming months is whether they can keep that buzz alive. The Pre will face mounting competition from other smart phone makers. Apple is unrolling new products, pricing and operating systems at its developers conference today. Whether or not the Pre’s soft opening was a thinly veiled attempt to manipulate the demand for the device is unknown (and flatly denied by the Palm spokesperson), but the sales over the next few weeks will be vital to the success of the Pre franchise.
The expectations for the Pre have been monumental as Palm shares have nearly tripled since the company announced the Pre at the Consumer Electronics Show in January. Shares are no longer undervalued, as we have a Fairly Valued valuation on PALM currently. Given the recent run up in price though, we would not expect a lot more upside in the shares in the near term. It is clear that Palm and its investors are counting on this release to propel this former smart phone titan into the next phase. Today, the market sold off on a lack of confidence that the Pre can be the iPhone killer it was supposed to be because of a lack of supply for the widely anticipated launch.
“…J.P. Morgan analyst saying sales in the first few days most likely exceeding 50,000. Sounds great but it actually falls quite short of the 146,000 reported for the first generation of the Apple iPhone. The Palm Pre’s problem, Sprint stores only carrying limited supply of the devices for Saturday’s launch. The new units are expected to arrive to stores nationwide this week as early as tomorrow, and not to be outdone, Apple stepping up and expected to unveil its newest version of its iPhone at the worldwide developer’s conference in San Francisco this week.” Fox Business Money for Breakfast 6/8/2009