Should Palm (NASDAQ:PALM) sell itself to the highest bidder? We've heard that call before and after yesterday's awful earnings preview, we're hearing it again.

"A Palm reading tells two fortunes: It's either a dire broken life line, or it's swept off its feet to a happy ever-after by a suitor like Hewlett-Packard (NYSE:HPQ)," wrote TheStreet.com's Scott Moritz.

He makes an astute point. And I'd agree if it weren't for Bono. But since his investing firm, Elevation Partners, has thus far committed $425 million to the business, I see no reason for Palm to rush into the arms of a suitor.

To borrow from Moritz, Elevation Partners is Palm's life line.

Why Palm should sell
Even so, there are good reasons for Palm to consider selling now. They're similar to the warnings offered in a letter from investor Mark Nelson to management in January 2006. Quoting:

Palm and the smartphone industry in general are in the upward part of this arc. Sales are robust, margins are expanding and the overall market is growing. Yet paradoxically, it is during this time that the Board should be looking beyond the current situation and considering the risks ahead. I believe the Board should begin exploring strategic alternatives, including a sale of the company, while Palm is in the ascendant.

At the time, Palm was trading for a split- and dividend-adjusted $10.48 a share, or a 48% premium to yesterday's close.

Need more grist to take Nelson seriously? Consider his take on Apple (NASDAQ:AAPL) from the same letter:

The prospect of Apple competing in the smartphone space is a daunting prospect for Palm. But all players in the smartphone space should similarly fear it. RIMM, HP, Motorola and others will need to reassess their competitive portfolio and position in light of an entry by Apple into the market. For these companies, an acquisition of Palm makes sense both offensively and defensively. [Emphasis added.]

You can argue whether Motorola (NYSE:MOT) would be better off today had it purchased Palm in 2006, but there's no doubting his clarity of vision with respect to the iPhone.

May we see your crystal ball, sir?
Today, Nelson is a partner with fund manager Mithras Capital. He made headlines late last year for suggesting that Microsoft (NASDAQ:MSFT) purchase Yahoo! for $22 a share after most of us had grown tired of the Microhoo circus.

He also no longer owns shares of Palm. Nelson confirmed in a phone interview earlier today that he sold after the company paid a special one-time, $9-per-share dividend mandated by Elevation's initial $325 million investment.

Would he have held if he knew about the forthcoming Pre? Not likely. "Even though it's a very good OS [WebOS], it's just too late," Nelson said. "Between the iPhone and the BlackBerry, they dominate the market."

Not entirely. Nokia (NYSE:NOK) still leads the global smartphone market but, in the U.S., the iPhone and BlackBerry are most visible. Yet the point remains; competition is everywhere, including up-and-comer Google (NASDAQ:GOOG) with its Android OS and Microsoft's Windows Mobile.

It's the same problem Nelson warned of three years ago and it's why he won't buy today. "I think the downside is much bigger than the upside," he said.

How to dismantle a nuclear stock
Nelson says there is a price at which he'd speculate: $1 a share. Ouch. But if published reports are correct -- if Elevation really has committed 22% of its $1.9 billion in assets under management to this one company -- then Palm has a built-in safety net. Elevation will keep this business elevated.

It can't afford not to.