Sure, I have a cell phone. Well, I didn't get one until about a year ago. I'm what marketing people call a "laggard." Is my phone smart? Not sure about that one. So I'm not an early adopter. But at least I'm not talking into my shoe like Maxwell Smart did on the old TV show "Get Smart".

PalmOne (NASDAQ:PLMO) is betting that there are plenty of early adopters out there, people willing to plunk down serious money for their Treo 600 and recently launched Treo 650 smartphones. According to the company's most recent 10-K, the objective of the Treo is to combine devices for the technology-savvy customer "who would otherwise carry multiple devices such as a cell phone, laptop, or handheld computer."

Driven by strong demand for smartphones (growth is estimated to be around 50% per year between 2004 and 2008) combined with flat growth in the handheld market, palmOne's revenue mix is changing. During the recently announced fiscal second quarter, smartphones accounted for 39% of revenues with the Zire and Tungsten handheld segments making up 61%. On the conference call, management said that product mix will shift to 50/50 by palmOne's fourth quarter ending in early June.

Investors seem to think the single-product strategy may be risky, however. The firm's share price declined by 22% the day following palmOne's earnings call on Dec. 16. Earnings of $0.53 exactly matched the Street estimate and were up 279% year-over-year.

Market reaction may well be a case of "buy the rumor, sell the news."

The rumor: palmOne was trading at a 52-week high as recently as last week, with shares increasing 30% between Nov. 1 and Dec. 16 on, among other things, the buzz surrounding the October launch of the Treo 650 smartphone. On Dec. 10, Merrill Lynch initiated coverage with a "buy," and shares jumped 12.5% on the next trading day's close. The shift in product mix to smartphones is expected to drive improved profitability, based on better margins than the handheld segments, over the next few quarters.

The news: While earnings in Q2 met expectations, they did not "beat the Street" after palmOne's stellar first quarter, in which it exceeded consensus earnings by $0.23. Gross margin, while improving on the year earlier period, was down by 4% to 29.1% sequentially, and units shipped, a critical industry metric, were less than analysts' expectations. Most important, Q3 revenue and earnings guidance of $280 million and $0.21 per share are below consensus estimates of $318 million and $0.27 per share.

So, is palmOne trading at an attractive valuation? I hope your crystal ball is better than mine. In addition to Merrill Lynch, Bear Sterns also downgraded palmOne. Adding to the valuation confusion, Merrill had a "buy" rating for less than one week before downgrading it to "neutral." PalmOne is trading at around 18 times its 2005 fiscal year estimate of $1.77 compared with an industry P/E of 30 for competitors in the mobile-device sector, such as BlackBerry manufacturer Research in Motion (NASDAQ:RIMM) and mobile-handset manufacturers, such as Motorola (NYSE:MOT) and Nokia (NYSE:NOK).

So, is palmOne cheap? Well, it's cheaper than it was a few days ago. I'll let it be your call. Smartphone optional.

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Fool contributor Chris Cather owns none of the companies mentioned and gets tired of making phone calls from his shoe when he can't find his cell phone.