Is It Time to Short Palm?

Palm (NASDAQ:PALM) can't seem to catch a break. Here's a sampling of the company's most recent run of bad luck:

• Net profit fell by 43% in its fourth quarter, which ended May 31.
• Rumors persist that the less-than-thrilling Foleo smartphone companion will be delayed.
• A new smartphone nicknamed "Centro," which made its debut at a media and analyst event on Aug. 16, is getting mixed reviews.

It all makes me wonder: Is it time to short Palm? Tell you what; let's get back to that.

Down to business
First, let's talk business. Palm has been doing less of it lately (year-over-year declines in bold):

To be fair, Palm's inconsistent revenue growth is partly due to the cyclical nature of smartphone sales. Consumers only buy when new gadgets are available, and Palm hasn't exactly been pumping out new Treo versions the way Nokia (NYSE:NOK) and Research In Motion (NASDAQ:RIMM) have.

But that could be changing, thanks to (hopefully) the Foleo and the Centro. Here's a look at Palm's inventory history matched to revenue:

This chart shows me two things:

• First, it suggests that Palm's poor 2007 was predictable, since a massive increase in finished goods inventory would likely result in discounting or other drastic warehouse-clearing actions.
• Second, it suggests that Palm's 2008 will be no worse than good, and possibly excellent. But that's only if you assume that Palm's research and development investments will result in winning products. I'm not so sure.

Where's the urgency?
Neither is Jonathan Goldberg, a Deutsche Bank analyst who recently told reporters that Palm lacks enough urgency in creating differentiated products and services that provide recurring revenue.

Goldberg is also the analyst who started the rumor that the Foleo would be delayed, which Palm has since denied. Which one is correct depends, in part, on how you define summer. For me, it means before Labor Day, and we've yet to see the Foleo.

Regardless, I'm intrigued by Goldberg's argument. He's right that Palm has been executing poorly when compared with rivals, especially Apple (NASDAQ:AAPL). And if Centro doesn't turn heads the way the iPhone did, or as Nokia has with its N-series phones, there's little reason to believe that the company will relive its long-lost glory days.

Or is there? I'm not sure Palm's make-or-break moment will arrive in fiscal 2008. Thanks to a capital infusion from financier Elevation Partners, funded in part by U2's Bono, Palm is bringing in plenty of device-design expertise. The new cast includes Jon Rubinstein, who once led Apple's iPod team. We won't know what Rubinstein can do till sometime in 2009, after the Centro is old news.

Don't get me wrong; I still don't believe that design genius is all that Palm needs. But it won't hurt, especially if Centro can't clear the high bar that the iPhone has set.

Don't hang up yet
Goldberg may yet be proven right. It may be that Palm lacks a sense of urgency. If so, now would be an excellent time to short Palm.

Yet with 25% of the outstanding shares of the stock sold short, that seems to be what everyone thinks. Crowds aren't often correct when it comes to investing, and I'm not so sure they're right here, either. There are simply too many deep-pocketed investors with a stake in the company's survival.

Still, Goldberg is right about one thing: Palm desperately needs a wake-up call. Here's to hoping that someone answers.

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Fool contributor Tim Beyers owned shares of Nokia at the time of publication. Find Tim's portfolio here and his latest blog commentary here. The Motley Fool's disclosure policy is screening its calls right now. Please leave a message at the tone. Beeeeeeeep.