3 Reasons I'd Sell Palm

Some of you believe that I'm guilty of allowing personal feelings to color my view of Palm (Nasdaq: PALM  ) . You think I'm engaging in propaganda. You want numbers to back up my assertion that Palm is a likely underperformer.

Fair enough. Here are three numbers-informed reasons why I would sell Palm right now.

1. Momentum rarely lasts
As my Foolish colleague Nick Kapur pointed out, shares of Palm are up 900% since December. Yet in that time, little has changed with the underlying business. All we've seen is a preview of the Pre smartphone, which promises to challenge Apple's (Nasdaq: AAPL  ) iPhone and Research In Motion's (Nasdaq: RIMM  ) BlackBerry. The implication: Investors are betting that the Pre will be Palm's savior.

2. Premiums must be earned
What happens if this electronic messiah doesn't delight users? What if they like Sprint Nextel's (NYSE: S  ) network even less than iPhone users like AT&T's (NYSE: T  ) network?

Technologically, the Pre certainly looks like a winner, but investors have bid up shares of Palm so much that there's little room for the device to exceed expectations. Numbers bear this out. Since 2004, Palm has most often traded for an enterprise value-to-revenue multiple of less than 1. Today, the stock trades for more than twice that.

3. Protection is paramount
Palm's best attribute is its partners -- Elevation Partners, specifically. Having poured hundreds of millions into the business already, Bono, Roger McNamee, and the rest of their investing bandmates have little choice but to supply whatever capital is required to mend this business.

Indeed, Palm could need more greenbacks. The company last produced a full year of positive free cash flow in 2007, and its debt represented 127% of total capital as of February, according to Capital IQ. Should management seek further cash injections, they'll come by way of stock sales, further diluting the interests of existing investors.

Palm's issue isn't the quality, price, or configuration of the Pre. Yes, the early evidence isn't encouraging, but hey, it's early evidence. I'm more concerned that Palm is priced as if the Pre is already an iPhone killer -- and I'm not about to take those odds.

That's why I rated Palm "underperform" in CAPS this morning. I'm betting that the stock will lose to the market over the next six months. Think I'm wrong? Make your bull case using the comments box below.

Brrrrring! It's related Foolishness calling:

Apple is a Stock Advisor selection. Sprint Nextel is an Inside Value recommendation. Try any of our Foolish services free for 30 days.

Fool contributor Tim Beyers had stock and positions in Apple at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is a disclosure messiah.


Read/Post Comments (12) | Recommend This Article (8)

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  • Report this Comment On May 20, 2009, at 2:04 PM, Rg2scribe wrote:

    Palm needs what America, herself, needs now and going forward: A comeback. Both are on their knees and vulnerable currently. The only way either is going to resurge is to innovate its way out of their respective slumps.

    There are many who say Palm is too late to the market-relevance party, a once-respected originator of PDA wizardry who lost her way, lost her paranoia with regard to the competition, and fell victim to value migration. Does this sound a bit like America's story?

    They both lost their fear. And fear is a powerful driver of excellence.

    Steven Jobs, as great as he is, has fear in abundance. The perpetual, ever-evolving pace of tecnological change necessitates that technology companies constantly look over their shoulder while keeping a keen eye to market leadership. Fact is, no one or two companies should dominate a market (APPL, RIMM), where consumers are deprived of the innovation of their brethren, of competition.

    I love APPL products, and RIMM products, and various others, because the competition among them makes them all better--and we, consumers, the better for it. I love Palm, probably more for its story, its underdog position, more than anything.

    As an investor, I'm cautious to remove emotion from an investment decision; therefore, I don't want to invest in PALM based on sentiment, but with logical, having-researched-the-numbers common sense. Yet, still, I'm rooting for the "little tech that could" as a metaphor for America herself.

    I want GM and Chrysler to make breathtaking, emotive, roadworthy vehicles again (like Ford is doing with the 2010 Taurus and Fusion hybrid). Like PALM, many have said the door has closed on the American carmakers, their market relevance and American consumer trust evaporated--while China and India et al salivate at the prospect of ever-increasing world-markets share.

    Everyone's at liberty to be partisan consumers, to patronize a favored brand or company. But when some actually "root" for the demise of a home-grown American company such as a PALM--the many jobs and tax base the company represents--it's an interesting commentary, no?

    Surely, the market rewards innovators, deft managers, superior companies, and the market will have its say on PALM; does it have the chops to compete with the behemoths? Perhaps, perhaps not.

    For sure, it has the audacity to try.

    I'm pulling for PALM not simply for my inconsequential investment in the company (no matter what it does, I won't get rich). I'm pulling for it vicariously as I'm pulling for America herself.

    We need our companies to compete and succeed, all of them. When China or India become the dominant players on the world market, that's not good for America, no? Just as when AAPL or RIMM become the dominant forces . . . .

    PALM needs what America needs right now: A Comeback. I'm pulling for both.

  • Report this Comment On May 20, 2009, at 2:07 PM, Rg2scribe wrote:

    Palm needs what America, herself, needs now and going forward: A comeback. Both are on their knees and vulnerable currently. The only way either is going to resurge is to innovate its way out of their respective slumps.

    There are many who say Palm is too late to the market-relevance party, a once-respected originator of PDA wizardry who lost her way, lost her paranoia with regard to the competition, and fell victim to value migration. Does this sound a bit like America's story?

    They both lost their fear. And fear is a powerful driver of excellence.

    Steven Jobs, as great as he is, has fear in abundance. The perpetual, ever-evolving pace of tecnological change necessitates that technology companies constantly look over their shoulder while keeping a keen eye to market leadership. Fact is, no one or two companies should dominate a market (APPL, RIMM), where consumers are deprived of the innovation of their brethren, of competition.

    I love APPL products, and RIMM products, and various others, because the competition among them makes them all better--and we, consumers, the better for it. I love Palm, probably more for its story, its underdog position, more than anything.

    As an investor, I'm cautious to remove emotion from an investment decision; therefore, I don't want to invest in PALM based on sentiment, but with logical, having-researched-the-numbers common sense. Yet, still, I'm rooting for the "little tech that could" as a metaphor for America herself.

    I want GM and Chrysler to make breathtaking, emotive, roadworthy vehicles again (like Ford is doing with the 2010 Taurus and Fusion hybrid). Like PALM, many have said the door has closed on the American carmakers, their market relevance and American consumer trust evaporated--while China and India et al salivate at the prospect of ever-increasing world-markets share.

    Everyone's at liberty to be partisan consumers, to patronize a favored brand or company. But when some actually "root" for the demise of a home-grown American company such as a PALM--the many jobs and tax base the company represents--it's an interesting commentary, no?

    Surely, the market rewards innovators, deft managers, superior companies, and the market will have its say on PALM; does it have the chops to compete with the behemoths? Perhaps, perhaps not.

    For sure, it has the audacity to try.

    I'm pulling for PALM not simply for my inconsequential investment in the company (no matter what it does, I won't get rich). I'm pulling for it vicariously as I'm pulling for America herself.

    We need our companies to compete and succeed, all of them. When China or India become the dominant players on the world market, that's not good for America, no? Just as when AAPL or RIMM become the dominant forces . . . .

    PALM needs what America needs right now: A Comeback. I'm pulling for both.

  • Report this Comment On May 20, 2009, at 2:40 PM, kingsrus wrote:

    I think that Motley Fool's tech stock comments seem to be contrarian to the tech market. Garmin has been heartily endorsed, but continues to lag behind. Sprint has been cast as a loser, but it has gone up over 250%.

    Sprint's 3G network is faster and more ubiquitous than AT&Ts, so if PALM's Pre is as advertised, and people actually try it, they will be pleased.

    So, while everything in the Smartphone race is risky, I believe that a good product on Sprint's better data network will please customers who venture there.

    I'm long PALM.

  • Report this Comment On May 20, 2009, at 3:07 PM, misterbull wrote:

    The question is what isn't priced into Palm. There is utter euphoria and hope priced into this thing. The short covering is the only thing allowing this thing to move. Fundamentally it has an uphill battle against two opponents that are only getting stronger, Apple and RIM.

  • Report this Comment On May 20, 2009, at 4:16 PM, TMFRhino wrote:

    kingsrus,

    FWIW- As disclosed in the bottom of articles, the newsletter service Inside Value currently recommends Sprint, while Stock Advisor recommended selling Garmin last year. In full disclosure, the service Global Gains still has an open recommendation for that company.

    Also, just because an article may be critical of Sprint's recent business practices or performance, that doesn't prevent them from liking the company from a value perspective. If you look back at coverage of Sprint, I think you'd find a mixed-bag of perspectives.

    Best,

    Eric

  • Report this Comment On May 20, 2009, at 7:30 PM, AZ123 wrote:

    "Some of you"??? How about one jerk, in particular: me! LOL

    You heeded my suggestions and injected some facts about Palm's debt load and lack of company profitability that more soundly backs up your thesis.

    The tone of this article is more clear-headed because of this different, more balanced approach.

    I give full credit where due and this is article brings about more respect and earnest attention. Well done!

    I won't even recall these articles to your attention when Palm's stock soars and stays high six months from now... ;)

    Take good care, Tim,

    AZ123

  • Report this Comment On May 28, 2009, at 8:20 PM, AZ123 wrote:

    5/28: Palm said the device's operating system, webOS, also allows Pre to synchronize with iTunes, Apple's popular music software, so users can easily transfer music, photos and video to their phone.

    5/28: Verizon, the No. 1 U.S. mobile service, will offer Pre in "six months or so," company Chief Executive Lowell McAdam said during a conference webcast.

    5/28: Randall Stephenson, the chief executive of AT&T, the No. 2 U.S. mobile service, said during a conference on Wednesday that his company would also like to sell Pre.

    Just goes to show that you folks render judgment before knowing all the facts...

  • Report this Comment On June 12, 2009, at 1:36 PM, MarkEvans24 wrote:

    I don't know if this is relevent or not, but there is a glitch in the new Palm Centro software. It's in the calendar function. If you enter a repeating task (like your daily exercise reminder), every time you sync the Centro with your computer (which you would do at least once a day) it duplicates the repeating tasks until you have have pages and pages of the same thing.

    Why am I bothering you with this? If you go to Palm's Customer Service forums for help with this problem, you will see that thousands (four thousand last time I looked) of people are looking for a solution and Palm is not fixing it. In fact, the later poster are telling subsequent readers not to buy Palm products. This issue is over 9 months old and I can't imagine shabbier customer service.

  • Report this Comment On June 12, 2009, at 1:42 PM, MarkEvans24 wrote:

    I also have an iPod and when I got the Cento I thought "I'll miss my iPod now because the Cento plays music." The music sync software is so cumbersome to use, it's far easier to carry around the Centro AND the iPod. If the Pre really does sync with iTunes it would be great, but my experience is that Palm has no commitment to Apple-level quality control. I'll never buy another Palm.

  • Report this Comment On June 12, 2009, at 2:01 PM, mwarnold2000 wrote:

    I always like competition in every market, everyone knows it makes us all better. I would like for Palm to be successful but one thing needs to be added in these discussions that I don't see mentioned anywhere.

    There is a powerful force known as perception, it's not based on anything substantive, doesn't care about technical specifications or ergonomics or even anything at all sometimes. The perception is that Sprint is a bad network and the Pre is too late to enter the game, developers won't make applications to support it and it's just not that cool.

    The perception associated with this release and this company is such that it might fail regardless of the quality of the phone itself or the network supporting it currently.

    Palm flunks every acid test I have, criteria such as debt, value to revenue and cutting edge technology among others. One other criteria it flunks as well is the perceived "cool" factor. I am shorting this stock and we will see it hit $11.00 and below in within two months.

  • Report this Comment On June 12, 2009, at 2:09 PM, mwarnold2000 wrote:

    "5/28: Palm said the device's operating system, webOS, also allows Pre to synchronize with iTunes, Apple's popular music software, so users can easily transfer music, photos and video to their phone."

    "Just goes to show that you folks render judgment before knowing all the facts..."

    Apple has the power to turn off iTunes to the Pre if it wants to. Jobs now is just weighing the options, will Apple make more money letting the Pre customers use its iTunes Store or make morey turning iTunes off to the Pre and probably sinking the Pre with it.

    The only reason Jobs hasn't pulled the plug on Palm already is that Apple might be perceived as being a bully much like Microsoft has been in the past.

    You might want to research "your" facts a little more before insulting others about knowing theirs...

  • Report this Comment On June 28, 2009, at 5:12 AM, AZ123 wrote:

    "The only reason Jobs hasn't pulled the plug on Palm already is that Apple might be perceived as being a bully much like Microsoft has been in the past.

    You might want to research "your" facts a little more before insulting others about knowing theirs..."

    Do know this for a fact, mwarnold2000? Or, are you guessing? Please attack a link to your above "facts."

    At least I referenced actual facts.

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