Pre Device Makes Palm a Short-Term Buy - UBS

Is Palm Inc. (PALM) widely lauded unveiling of its new Pre device a game changer for the company? Count Maynard Um at UBS as one analyst pleasantly surprised by the announcement.

Although the company still has a number of challenges ahead of itself, he says it's clear the winds have shifted in Palm's favour as he upgraded his rating to "neutral."

"We believe [there] is a balance of some Pre success against medium-/longer-term challenges (transition quarters, timely launch, more carriers, et al)," Mr. Um said in a note to clients.

We are also introducing a short-term Buy rating ahead of the 3GSM World Congress trade show in February (UMTS/3G version expected with a potential carrier). The stock has round tripped back to October 2008 levels and further positive news flow could drive the stock higher particularly given limited float.

There are still some risks, Mr. Um notes. The Palm Pre likely has some work to do before its ready commercially, including challenges in making sure its software is bug-free. There are also carrier contracts to sign as well as the increase in Palm's marketing budget – something that could also limit how many operators the company can launch with – which could factor in its execution.

Mr. Um said:

Though this may not matter from a longer-term perspective if the device is successful, prolonged delays could put the company in a position where it may have to raise more capital.

Based on the Palm Pre's launch, Mr. Um raised his 2010 fiscal year revenue estimates from $1.03-billion to $1.68-billion with pro-forma earnings from a loss of $0.52 per share to a net gain of $0.48 per share.

Comments

[Dirkyp:]

I know Goldman thinks it's worth $0.40 per share, or a decline of over 90%.

The Pre is a nice unit but is more or less a me-too product, they can't compete against massive rival's RIM, Nokia, and Apple, and Sprint will likely be the only tier 1 carrier offering it for a long time. And it won't ship for several quarters which means the hype will die down and other devices will be announced.

In the meantime PALM is burning lots of its cash - estimate of $100M over next 4 quarters - they only have $185M or so, and they have $400M in debt so they may have to raise dilutive equity.

So poor consumer environment, smartphone competition heating up significantly, inferior carrier channel, cash burn, and post-CES hype.

My view is that a home run is priced into the stock and that at best they might hit a single before it starts raining and the bankers call the came.

Jan 14 04:20 PM