Update on the Pre and the Fate of Palm

It is generally accepted that the new Pre handset is a make or break device for Palm (PALM). Just over a month since the release of the Pre, reports vary widely in terms of the sales expectations. Backed by positive reviews of Palm’s new operating system, the Pre sold well initially, with reports of selling out in just minutes at many locations across the country. However, those results were subject to criticism because severe supply constraints limited the amount of phones sold and the stock actually dipped after the launch weekend’s sales were tallied (According to the Market, Palm Pre Fails First Test). In the month since that weekend the stock has risen impressively: Palm is up 19% compared to a 5% decline in the S&P 500 benchmark. Is this run-up justified by the results, or is it more a product of hype?

The release of the Pre was highly anticipated and it was no surprise to see it sell out in its first weekend; the larger question was how would the Pre hold up after the release of the new Apple (AAPL) iPhone. This is where it gets really interesting, because estimates are all over the place. Analyst Edward Synder of Charter Equity Research has estimated that the Pre has sold 300,000 units already and that Palm will ship 1 million units in the first three months. Those estimates are aggressive to say the least and probably are a best case scenario as the Pre sold about 50,000 units during its launch weekend.

On Monday, Techcrunch.com, a renowned technology news and blog site, published an article about the Pre suggesting a very different outlook for the company. The article quotes a survey run by wireless consulting group iGR that, according to the survey of about 50 participating Sprint (S) stores, the demand has slowed considerably in just the first month. Not a single store in the survey reported having inventory shortages of Pre’s and the majority had “plenty” for sale. Over the last few weeks, the number of stores surveyed saying they are sold out has shown a steady decline from 38% in week one, 28% a week later, 8% last week, and finally none in the latest survey. The encouraging signs from the survey was that a significant portion of customers buying the Pre are new to Sprint, but this seems to bode well for Sprint more than for Palm.

Of course, this survey provides only anecdotal evidence as it is not comprehensive of all Sprint stores, but it is a trend that tells you something important. Palm, with its wacky balance sheet which shows negative total equity, will need to justify the stock’s quadrupling year to date with strong and consistent sales of the Pre. The smart phone industry is a crowded market, but it is growing rapidly and Palm is trying to get a significant slice of the pie in order to right the ship. At this point, we are not putting much stock in either of these extreme predictions for how Palm is doing thus far, but we do think that the Pre is facing significant headwinds. The timing of the Pre launch seems to have been sub-optimal as the new iPhone released just days after the Pre stole a lot of its thunder. In the months leading up to the Pre’s launch many Pre supporters welcomed the comparison to the iPhone and many touted it as the first legitimate “iPhone killer”. Considering most estimates have the Pre sales on opening weekend of about 50,000, but the iPhone sold more than 20 times that number the weekend of its release; Palm is facing strong and established competition.

Ockham currently has Palm stock’s valuation as Fairly Valued and nearing Overvalued territory, and we cannot justify recommending a stock that has such a poor quality balance sheet and with nearly all of its hopes laying at the feet of one product, no matter how great it may be. Furthermore, as we stated before, the stock has quadrupled on the hype of the Pre, and even relatively strong sales may not live up to the expectations. From our perspective, the sales estimates are mostly speculation at this point, but what we know is that the Pre faces headwinds that make it a stock that will only really interest momentum seekers at this point, as no value investor can still be interested. We do not short any stock, but if we did this stock would be on our radar. Surely, many shorts have covered as Palm has rebounded from very low levels, but there is still a significant short interest at 28.5% of float.

Original post

Comments

[JamesApple:]

iPhone is not a good candidate for picking an enemy with, it's like playing tennis against a wall. Palm should re-focus on taking market shares from Research In Motion because Rim is retreating on all fronts. Palm should get in the fray of Rim-beating before the feast is over, everybody else is poised to feast on Rim.

Jul 07 01:49 PM

[Norrsken:]

What about the fact that Pre is limited to Sprint at the moment? I'm looking forward to getting two of these (one for wife, one for me) once the phone is released on Verizon. IMO this phone should do very well on Verizon since it's iPhone wannabe/competitors aren't, imho, as compelling as the Pre.

Jul 07 02:15 PM

[JamesApple:]

There are some unlocked Pres for sale.

Jul 07 02:30 PM

[CGP:]

- It's been stated by Palm and their VC that their target market is somewhere between RIMM and AAPL and not directly at either, as most people automatically assume.

- That they have adequate supplies to meet demand in stores doesn't seem to be a problem to me; in a context besides Apple isn't that good planning? Absent that mania, it seems they are hitting their marks. I also wouldn't doubt a lot of Verizon people and others are waiting for WebOS to come to their service (I am too).

- Pre isn't necessarily make or break; if it had come out and fallen flat on its' face that would have been a stake to the heart but it didn't. It got the foot in the door for WebOS, now Palm can make and sell their own devices as well as license out the OS.

Jul 07 03:03 PM

[Zobby:]

Pre apologists don't get certain things.

They say that the Pre is doing well, iPhone outselling it is not a big deal as the Pre is being sold only in one country. But that's just it, by the time Pre moves to other countries and other carriers and by the time it gets its SDK out and then apps it'll be months. By that time iPhone will be out in more countries like China and people will be anticipating NEXT iPhone (4.0.)

Already the iPhone has more 'consumer attractive' features like video, tap touch autofocus, google maps that orient with magnetometer etc. (lots of general consumers don't understand Palm advantages like 'synergy') and by the time Palm gets SDK carriers together iPhone will be 4.0 and further ahead. Apple is right when they say they're way (years?) ahead of the others.

People ask what iPhone can do that Pre can't, some people answer video etc. but the real answer is 50,000 things. That's apps in the app store that Pre doesn't have. And by the time they do have significant numbers (and many developers are not very keen as the installed base is so tiny vs iPhone. 1 subscriber for about 300-400 iPhone OS) iPhone would have moved the benchmark further ahead.

If video comes to the iPod Touch later this year as rumored the iPhone OS base will explode even larger. Outselling Pre 10-20 to one means that Apple will also always have more cash for R&D and marketing.

Also currently although the Pre and iPhone 3GS are having teething problems the Pre seems to be significantly more: build quality resulting in cracks etc. Note since the iPhone is outselling Pre 10-20 to one if iPhone problems are equal are more than Pre the number of complaints should be 10-20 times more in the forums but that's not the case, in fact complaints from Pre owners seem to be outpacing iPhone 3GS owners. Palm needed a light years ahead phone (but is missing things like video camera) with competitive number of apps, superior build quality and cheaper to compete with the iPhone, it doesn't have it.

Jul 07 03:17 PM

[JamesApple:]

Why aren't there any direct comparisons between Palm and Rim (Retreat In Motion)?

Jul 07 04:34 PM

[Aryamehr:]

There is a major fallacy in any argument that compares iPhone sales to the Pre sales on their respective launch dates. Remember when the first iteration of the iPhone was introduced the market was completely different. The iPhone practically had no competition and they essentially had an open field and a Smart phone consumer begging for anything that had decent Voice/Text/E-mail capability and coverage, however the circumstances surrounding the Pre were completely different. A good analogy for the Pre would be if you were to offer your guests a gourmet meal after they had just been to an established food chain such as Flemmings Steak House and had a three course meal. No matter how good your food it will never be as good or better unless the consumer is equally hungry. The current Smart phone market is reletively saturated but far from satiated. The Smart phone market is one of double digit growth and it is here that the Pre should look for its customers. Many iPhone customers are innured and tethered to their phones, with contracts that would make it unreasonable for them to switch to another carrier, however I do see many changing carriers but only after they have completed their contracts with ATT. What Palm needs to do is continue innovating and remain consistant in its approach to the consumer by providing quality applications rather than innundating the market with rubbish, only to boast of quantity to satiate those that redicule its current purview of Applications. With time the Pre will become more established among consumers and a fairer comparison will emerge. IMHO the Pre is still the king of the market and it has only been around for a month. This time next year there will be millions of Pre users and thousands of applications to choose from at which time you will be able to make a more accurate analysis on how well the Pre is doing relative to the iPhone and the rest of the Smart phone market.

Jul 07 05:30 PM

[Aryamehr:]

Zobby, first you should note that the iPhone has nothing, and I emphasize Nothing! that is light years ahead of anyone, yet alone the Pre. The Applications that you and many iPhone fans tout over and over again have been created over a period of more than two years and anyone with any intelligence knows that 95% of them are junk applications that will never make any money. A recent article in Fortune magazine will corroborate this in case you were unaware. Now let us see what these great innovations are that you purport are light years ahead in the GS; the Compass, Video, extra memory (at an extra fee). Well, for your information any company can buy extra memory at $15/8Gigs and the video technology is by no means Apples technology. Many Asian manufacturers had the video in their phones a year or so before the iPhone. I for one have an HTC Diamond that could video anything I wanted last summer. In fact the GS has essentially caught up in many aspects, such as introducing a Landscaped virtual keyboard, improving its camera from a 2 MP to a 3 MP and adding a 'cut & paste' function. It still lacks a flash on its camera, it still doesn't have an option for changing the battery, and it still can't Multi-Function. And no matter what the iPhone does it will be tethered to the wireless carrier ATT, which will not have 4G until the latter part of 2011 and most probably 2012. On the other hand the Pre will have a ubiquitous 4G platform (from Sprint) by the end of this year and many more applications, ie quality applications.

You are correct that Apple has much more money available for R&D, but don't be fooled, innovation and R&D are not directly proportional to one another. IBM, Lucent Tech, MSFT all had innordinate amounts of resources but they were unable to prevent smaller companies from usurping them and the same is true for Apple. Remember, history always repeats itself, granted in different colours but the essence is no different.

Jul 07 06:00 PM

[JamesApple:]

When I jailbreak my iPhone with Cydia, my iPhone becomes a full blown Unix server capable of running existing Unix programs that are currently running on my company's other Unix servers for critical enterprise applications such as employee payroll, accounts receivable, general ledger, supply chain functions, marketing campaigns and promotions, sales, I even use my iPhone as a POS, RFID warehouse control, shipping, receiving, management reporting, business intelligence. I fully utilize the 16 gig of iPhone flash memory, I import/export business information, email, SMS, twitter, contacts, calender using MobileMe as my cloud service giving gigabytes of storage anywhere, anytime, I set up my iPhone to multiple Unix servers running scripts and cron jobs, I have access to teams of open source expert developers developing java, web applucations, c programs, php,

Jul 07 06:28 PM

[Zobby:]

@Aryamehr

read my post carefully before commenting.

You mention repeatedly that I said the 3GS was 'light years ahead', I never did (although it might be accurate), I said the Pre had to be light years ahead of the iPhone to beat it (as the iPhone is the market leader).

Saying that 95% of iPhone apps is junk is just wishful thinking of iPhone haters. Any statistical or impartial review to back up your claims? You mention Fortune magazine "a recent article in Fortune magazine will corroborate" but you're misleading, the article I believe is "iPhone apps: For fun and profit?" and it doesn't say 95% is junk, it says investment firm Kleiner Perkins thinks 95% are from small companies or hobbyists. Small companies and hobbyist can't make good apps? They're all junk? Small companies have made BIG bucks on the iPhone, a 99 cent app to several million buyers is a lot of money. A recent featured app on iPhone commercials was a bird watching app which is big seller made by a hobbyist. Kleiner Perkins has a 100 million fund (100 million!) for iPhone developers and is very bullish on iPhone application and previously has said that the iPhone was the birth of New Platform like the birth of the PC revolution. Talking about the 95% is probably K.P putting down it's iPhone competitors as now hundreds of new developers are jumping in some with millions of dollars in funding. Do you think K.P one of the top tech investment firms in the U.S is going to put 100 m into iPhone app development if it thinks iPhone is bad? really!

Talking about Fortune, Apple is No.1 on Fortune's 2008 most admired companies list!

Also What makes you think all Pre or Google apps are wonderful? This is so indictive of iPhone criticisms: 'we'll make something up from our minds i.e 95% are junk'. It's silly reasoning with no impartial factual studies to back it up. But even if it was true which it isn't that means there are still plenty apps which are good there! (5% of 50,000 is 2500. There are only 30 or so Pre apps). Also is it logical that developers only write good apps for the other Phones while junk for the iPhone, does that make sense? Of course not.

As the for the Touch Diamond, did it sell 1 million in a 3 days? The HTC Touch Diamond runs Win Mo which is a from many sources a sucky OS, even Sony and Samsung (big Msft. customers) have ditched Win Mo for their flagship phones this year and gone to Symbian. Having features but as some said "you don't have a good OS and can't use them easily what the point?" Again any Touch phones sell over a million in 3 days?

And you miss the main point of my post . You say "This time next year there will be millions of Pre users and thousands of applications to choose from"
Exactly, one year! iPhone has 50,000 now. By next year like I said iPhone will be one year ahead again, with iPhone 4.0, so how will Pre ever catch up?

Jul 07 06:55 PM

[Aryamehr:]

First, I never claimed that Apple or the iPhone was a bad company or a bad phone, but I did insinuate that 95% of the applications on their iPhone are junk, however I was mistaken, in actuality 98% + of those applications are useless and will never garner critical mass to make them worthwhile. The point is not the quantity of applications that are available but rather the quality of applications and you can rest assured the Pre will have practically every applicaiton worth having in a shortwhile. One flaw that the iPhone will have difficulty in overcoming is being tethered to an inferior ATT platform that will not evolve into 4G for some time to come, unless Apple is smart enough to wean itself away from its Exclusivity with ATT.

Jul 07 07:50 PM

[Zobby:]

@Aryamehr:

First you claim that 95% of iPhone apps are junk and then said Fortune backed you up. I checked the article and replied the Fortune article merely quoted Kleiner Perkins mentioning that 95% are from small companies or hobbyists. (And K.P has a 100 m fund for iPhone developers so believes in the platform). Taking 'small company and hobbyists" comment to equal junk is stretching the truth!! - did you think people would just take your word and won't check the article? I already showed you that some hobbyists like the bird watching app developer has made excellent apps. Apps which are reviewed positively, in high demand and featured in commercials. Other developers like Trism developer (more or less a one man show) has made hundreds of thousands of dollars. But even free gaps can be great. After I have shown you misquoted Fortune and the 95% you now claim from thin air that 98% is junk "in actuality 98% + of those applications are useless ". Again where is the impartial reviews or statistics to back up your 98% claim , making it up in your head doesn't prove anything. LOL!!

You say "you can rest assured the Pre will have practically every applicaiton worth having in a shortwhile." That's a personal opinion, but where's your factual backing of this? On the other hand factually I can point out there are only tiny handful of apps now and already reviewers who own Pres are saying they are bored with the Pre as there are no apps, for example : Ars Technica "Why the iPhone which beats the Pre for Air Travel", I quote: "What I found is that the Pre is a pretty boring travel companion who tires way too easily." (tiring too easily part is the 'famous' multi tasking phone's battery).

Again factually Palm says SDK won't be out until late summer and then after that developers will have to want to write for a tiny platform like the Pre vs the iPhone OS (iPhone and ipod Touch) and even if they do it'll take more time. By then there'll be more iPhone apps and people will be awaiting iPhone 4.0. As for AT&T, there's just as many complaints about Sprint (Sprint is the one losing millions of customers the last few years you know) and AT&T is only in the U.S, iPhone sold in dozens of countries. Also AT&T contract expires next year and Apple free to do whatever it wants. (Right now AT&T also gives Apple very high profit percentages back as they want the exclusivity to drive customers to AT&T.)

As the above article shows Pres are no longer hot selling items while latest news is that Apple (with the AMR number one rated supply and manufacturing chain in the U.S) is not meeting demand of iPhones, white ones are still selling out.

Jul 07 09:18 PM

[JamesApple:]

If you a mobile developer, choose Apple's mobile OSX, it is open source system Unix.

Jul 08 02:21 AM

[EJL:]

And this is exactly why you have no clue about the general market for these devices. You believe that just because you are an uber-geek with a powerful platform in your hand, able to do all these things (that maybe 1/100th of 1% of mobile users actually do) it will automatically translate to market dominance to the point that all other competitors are vanquished. If you think like a layperson, a non-techie, you will see it is obvious that many users will choose an iPhone, many users will choose a Blackberry, many users will choose a Pre, and many users will choose other devices. In an industry subset that is growing so dramatically over the coming years, doesn't it stand to reason that many manufactures will prosper? This is just a natural progression of current trends. If you got your head out of your unix server, you would see this.


On Jul 07 06:28 PM JamesApple wrote:

> When I jailbreak my iPhone with Cydia, my iPhone becomes a full blown
> Unix server capable of running existing Unix programs that are currently
> running on my company's other Unix servers for critical enterprise
> applications such as employee payroll, accounts receivable, general
> ledger, supply chain functions, marketing campaigns and promotions,
> sales, I even use my iPhone as a POS, RFID warehouse control, shipping,
> receiving, management reporting, business intelligence. I fully utilize
> the 16 gig of iPhone flash memory, I import/export business information,
> email, SMS, twitter, contacts, calender using MobileMe as my cloud
> service giving gigabytes of storage anywhere, anytime, I set up my
> iPhone to multiple Unix servers running scripts and cron jobs, I
> have access to teams of open source expert developers developing
> java, web applucations, c programs, php,

Jul 08 10:48 AM

[EJL:]

You explicitly contradicted yourself here. You can't say give it time to catch up AND Pre is already king of the hill. You are delusional if you think Pre is king - there is nothing factual to support this, not the launch (50k units?), not the lack of apps (what 18 apps?), not the shoddy construction (cracks? many quality issues), not the barely usable keyboard (did they put any time into designing it or the knife's edge at the bottom - JNJ stock has surged from all the band aid sales from cut up Pre users), and certainly not the copied browser and gestures. So I ask again, how can Pre both catch up in a year AND be king of the hill already? Your posts are worthless.


On Jul 07 05:30 PM Aryamehr wrote:


> With time the Pre will become more established among consumers and
> a fairer comparison will emerge. IMHO the Pre is still the king
> of the market and it has only been around for a month. This time
> next year there will be millions of Pre users and thousands of applications
> to choose from at which time you will be able to make a more accurate
> analysis on how well the Pre is doing relative to the iPhone and
> the rest of the Smart phone market.

Jul 08 11:00 AM