Palm’s Race Against the Clock

OK, time to get reacquainted with standardized testing. I've laid out five options below; pick the one item that doesn't belong in the grouping. Go ahead, I'll wait.

  1. Six straight quarters of negative earnings.
  2. Massive deterioration of market share.
  3. Dilutive capital infusions.
  4. The worst investing environment in more than 70 years.
  5. A 400% return in recent months.

Was your answer ... none of the above? Well, in the context of Palm (Nasdaq: PALM  ) , you'd be absolutely correct.

Forget the past, embrace the future
The smartphone maker, having struggled to keep up with a murderer's row of competitive forces in smartphones -- including Research In Motion (Nasdaq: RIMM  ) , Apple (Nasdaq: AAPL  ) , and Google (Nasdaq: GOOG  ) -- has seen its fortunes turn around in recent months, despite abysmal financial performance.

The reason? Palm recently bet its future on a new smartphone known as the Pre. Fortunately for Palm, tech enthusiasts have raved over the Pre's innovative operating system and features. So who cares if the company is on financial life support? Investors bid up Palm's shares on the promise of the Pre being able to deliver boatloads of profit in the future.

Well, that was ugly
Well, there's one key problem at the moment: The Pre's not out yet. Even worse, no one wants to buy a tired, old Palm Centro phone when they know the Pre is just months away from release. Keeping that last point in mind, Palm warned yesterday that revenue could be off as much as 70% from last year when it reports third-quarter earnings later this month. Put another way, revenue should come in 45% below previous analyst expectations. Ouch.

How will the company finance its operations until the Pre is released sometime in the first half of this year? Palm believes it has "sufficient cash, cash equivalents and short-term investments to meet its working capital needs under its current operating plan."

However, the ante was just raised in Palm's race against the clock to get the Pre into users' hands. Yesterday's news illustrates not only how much of an all-or-nothing move the Pre release will be for the company, but how time-sensitive the release will be. If Palm delays release, it not only faces the typical threats of weakening buzz and strengthening competitors, but also another round of potential shareholder dilution.

From this Fool's perspective, the Pre shows quite a bit of promise. Not only is it a game-changer for Palm, it also provides a sorely needed shot in the arm for exclusive cell provider Sprint (NYSE: S  ) , which will heavily market to the new gizmo. However, yesterday's news accentuated some of the risks involved with this rocketship of a stock. Tough time to launch a product, tough competition, tight timeframe. Proceed carefully -- Palm's already thin margin of error just got a bit slimmer.

Sprint Nextel is a Motley Fool Inside Value selection. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation.

Eric Bleeker cries every time he hears Metallica’s "Enter Sandman," but other than that, he professes to be normal. He owns no position in any of the companies mentioned. The Fool's disclosure policy is just what Katy Perry is looking for, neither hot or cold, just smooth and velvety.


Read/Post Comments (5) | Recommend This Article (82)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 04, 2009, at 6:53 PM, PCTechnologist wrote:

    I am rooting for Palm and the Pre, but they need to ship this before the next iPhone (end of June or July most likely) or they will be dead in the water. Palm also needs to be actively working with corporations for Exchange/Email integration. I would dump my BlackBerry (Bold) for a Pre if it not only synced my "online life" but also my work email, calender, and contacts. It needs to be all things in one like the BB Bold, Curve, and Storm are today. Lastly corporate email integration is the last feature really holding the iPhone back and once Apple gets that mastered (Maybe in the next release), Palm, RIM, and Microsoft will be fighting over the smart phone scraps. I know I didn't talk much about windows and S60 but until Windows Mobile 7 is released there is nothing to talk about, and S60 is heading off into the sunset, much like the original Palm OS is did.

  • Report this Comment On March 04, 2009, at 7:14 PM, Aryamehr wrote:

    PCTechnologist, I concur with all that you have stated and I am privy to the fact that Palm is working on the Exchange/Mail integration, however all this will be useless unless Palm introduces the Pre in a timely manner. I just can't wait to get my hands on one these Pres.

  • Report this Comment On March 05, 2009, at 11:27 AM, TheStir wrote:

    Aryemehr, You misunderstood PCTechnologists point.

    They said Palm needs to be workign with corporations that have large Enterprise systems.

    This is not being done whatsoever. Microsoft has extensive infrastructure to support Enterprise and large corporations and actively helped then integrate WM. Palm hasn't this infrastructure is is doing nothing at all in this regard.

    This means Enterprise is likely to wait a year or so to feel secure in integrating WebOS, which is a band new OS and could cause large costs and problems for Enterprise and large corporate bases.

    Please don't come on these boards and say you are "privy" when that is not very credible and you are not addressing the real issue which is known because Palm has no people at all deployed to deal with this and doesn't have the resources.

  • Report this Comment On March 06, 2009, at 12:34 PM, curiouso wrote:

    Valid points all, however Palm announced on the 4th (before this article posted, I believe) that the Pre will be available in stores on Mar. 15th. So in a stroke, most of your main points are null--short term cash flow, worries over shareholder dilution, stagnant sales of Centro, etc. Of course it's still an all-eggs-in-one-basket scenario for Palm, and so any hiccups even if the Pre succeeds wildly could still be disastrous.

  • Report this Comment On March 09, 2009, at 6:44 PM, TMFRhino wrote:

    Curiouso,

    To my knowledge, the only confirmed release on March 15th is the stop-gap Treo Pro. There were rumors that the Pre would launch March 15th, but they haven't been substantiated.

    http://www.pcworld.com/article/160702/palm_treo_pro_availabl...

    Foolish best,

    Eric

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