Reading Palm: Pre Sales and the Secondary Offering

Palm (PALM) reported fiscal first quarter results after the close on Thursday, and the company answered some big questions that investors needed answered to justify the stock’s amazing run. This summer Palm stock rose above $16 per share, which is more than 10x the stock’s low last December. Of course, most of the stock’s momentum is due to the great potential of the Palm Pre handset, but potential was no longer going to be enough. There needed to be proof in order to satisfy investors that the price appreciation of Palm has staying power.

Many analysts had started to become a little more cautious on Palm stock in anticipation of the fiscal first quarter release. Peter Misek of Canaccord Adams lowered his revenue and earnings estimates to well below the consensus level this morning saying he is more cautious of Pre sales after conducting surveys and channel checks. He lowered his estimate for Pre unit sales by 33% from 750,000 units to 500,000. Considering the Pre is by far the most important product for Palm that could mean trouble for the stock.

Ilya Grozosky of Morgan Joseph & Co. was even more conservative in his view of Pre unit sales, anticipating just 400,000 units sold. Grozosky is one of the more bearish analysts having downgraded Palm shares twice; from Buy to Hold in April and then from Hold to Sell in August.

These estimates would place Palm’s devices well behind the industry leaders with Research in Motion (RIMM) selling 7.7 million units last quarter, and Apple (AAPL) selling more than 5.4 million iPhones in its second quarter. To date, Palm had not reported sales figures for the Pre specifically, and with so much riding on one device there many were skeptical of its ability to grab market share.

In combination with some bearish analysts on Wall Street, coming into earnings there was a substantial short interest in Palm. The options activity slid to the bears side into the report, with puts outnumbering calls. Not to mention, the Motley Fool CAPS investor sentiment survey thinks this stock will underperform the S&P. There is no doubt that many investors had lost confidence that Palm’s stock belongs at this valuation.

Palm answered investors' concerns about growth and unit shipments for the Pre. Palm said that they shipped about 832,000 as of this quarter, which enabled the company to easily outperform Wall Streets expectations. First quarter EPS came in at a $.10 loss versus estimates of a 23 cent loss. Revenue also topped estimates easily. With Palm lowering the price of the Pre last week and a new smaller Pixi model due out soon, there will be the opportunity to expand on this market share going forward. The growth aspect is better than the doubters had anticipated.

Perhaps overshadowing the quarterly earnings results, the company announced a secondary offering of 16M shares. This will help raise capital for a balance sheet in severe need of assistance. Palm has burned through a lot of cash prior to the launch of the Pre and has had negative shareholder equity on their balance sheet for the past 3 quarters. With capital markets hospitable, this move makes a lot of sense.

We are reiterating our Fairly Valued rating on Palm as of this week’s report. Value investors will not be enticed by the fundamentals of this stock, but it is clear that this is not a “value stock”. If the stock were to trade on fundamentals it would be lower, perhaps much lower, but showing growth in arguably the hottest sector (smartphones) is driving their multiple higher. This stock does not suit or investment style at Ockham, but today was a big step towards justifying its lofty price.

Original post

Comments

[jmmx:]

Disclosure: 1- Shorting Palm (bought puts) 2- I am an Apple fan. This is not to say that I do not wish Palm well. I really wish them the best.

That said - I do not see how the Pre has lived up to investors' expectations. This was the phone that was everyone was to trash their iPhone to get, and they did not even sell 1 million. To me, $14 is a hope and a prayer -- and then add 16M shares dilution...
(IMHO)

Sep 17 09:04 PM

[FreeRange:]

Palm will at best just continue bumping along taking share from others, but not Apple. Its customer satisfaction levels are not that high, and they are not a platform play like Apple (closely integrated across the desktop, cloud and handheld by the iTunes store and MobileME, and the more sophisticated and powerful OS X).

Sep 17 09:43 PM

[FreeRange:]

The author's comment below is very misleading and grossly inaccurate:
"Palm answered investors' concerns about growth and unit shipments for the Pre. Palm said that they shipped about 832,000 as of this quarter..."

Reading through the transcripts Palm stated no such thing. They would not break out Pre numbers. That number they gave was in fact for their FULL product line which includes the Treo and Centro phones which still have a substantial sales and distribution base with MULTIPLE carriers. While the overall NET increase from PREVIOUS quarters probably included mostly Pre phones, the estimates of 400-500,000 Pres sold can most certainly be accurate. And for certain, all 845k units were not Pres.

Sep 17 10:47 PM

[RK:]

I agree. Palm just said on the earning call that the majority of the shipment was Pre, but it refused to give the # of Pre sold to Sprint when pressed by an analyst. If the number exceeds analysts' expectations, we would think Palm would give the number.


On Sep 17 10:47 PM FreeRange wrote:

> The author's comment below is very misleading and grossly inaccurate:
>
> "Palm answered investors' concerns about growth and unit shipments
> for the Pre. Palm said that they shipped about 832,000 as of this
> quarter..."
>
> Reading through the transcripts Palm stated no such thing. They would
> not break out Pre numbers. That number they gave was in fact for
> their FULL product line which includes the Treo and Centro phones
> which still have a substantial sales and distribution base with MULTIPLE
> carriers. While the overall NET increase from PREVIOUS quarters probably
> included mostly Pre phones, the estimates of 400-500,000 Pres sold
> can most certainly be accurate. And for certain, all 845k units were
> not Pres.

Sep 18 12:21 AM

[Timeline St...:]

A further point on the numbers used in this research briefing:

You say "Apple...selling more than 5.4 million phones in its second quarter"...". This statement is incorrect on two counts.

First, Apple sold 5.2 million phones in the calendar second quarter. That can be seen here: www.apple.com/pr/libra...

The difference is minor, but because it's a published number, there is no reason to get it wrong, even by 3.85%.

Second, the calendar second quarter is Apple's fiscal 3rd quarter. Again, this is known, and precise use of relevant timeframe makes the point clear and correct, and avoids confusion.

Good research starts with details, not sloppiness, or pulling numbers that appear to be close enough.

Sep 18 01:53 AM

[jmmx:]

One more possible problem here...

832,000 units shipped - of those how many were actually sold?

Some (I would assume) went to inventory fill. It is also possible that a significant number went to replace defective units. There are reports that there was a vary high defect rate. Does a replacment unit count as a second unit "shipped"??

Sep 18 02:05 AM

[GoochyPuppy:]

PALM is no AAPL. And it ain't Google/Android either.

Sep 18 03:47 AM

[Yagottabe K...:]

Palm at first said (everything paraphrased) "sell-in and sell-through were majorly Pre". When an analyst threw those words back in Palm's face by saying "You said sell-in was majorly Pre and sell-through was majorly Pre" the CFO came back and said "We didn't say that - we said sell-in plus sell-through was majorly Pre" - that's an apples and oranges combo as other posters have pointed out. We EASILY can (correctly) assume sell-in was almost entirely Pre. If Palm sold-through ONLY, say, 200,000 Pres then sell-in and sell-through could be ambiguously quantified as "majorly Pre" even though sell-through would have been majorly NOT Pre.

Sometimes it's what they do NOT say that's important, huh?

Sep 18 07:16 AM

[DerekNJND:]

not sure why everyone hates on palm. sure, they're like the shortest kid on the basketball team, but thats like being the worst player on an all-star team. In any case, when considering competitors on a global scale, Nokia should be included--a company that I was bullish on most of the recent era, hoping they'd adopt smart phone technology well enough to hang onto their strength--market share. but they're not and Apple in China, possibly going around ATT soon really hurts Nokia the most, and RIMM second. I just dont see how the big players are a real threat to Palm...they'll be the best alternative for those who can't afford an iPhone or BlackBerry, or dont have service/plan with a better option available. Their main competition in that space is full of NOBODIES!! Nokia will fade, LG? Samsung? Sony/Ericcson? Moto? Palm's a leap and a jump ahead of those names.

So I wish everone would quit stacking Palm up next to Apple--they really dont even compete in the same primary markets, with a niche in people ages 25+ who dont want the flash or cost of an Iphone, and either cant afford a BlackBerry or just like them (I personally hate them lol).

Plus, Palm's chart is a thing of beauty. Technically speaking, even the biggest doubters have to admit the stock as been resilient despite a weak telcom sector in general lately and the unclear fundamental issues are overshadowed by that beautiful chart, for me at least. if earnings couldnt be the catalyst to send Palm back below $13-14 range, not sure what will beat this stock down. The dilution of an offering? Haaaaa, not in this market. If bulls digested the hundreds of billions in shares of C, BAC, MS, WFC, etc etc. in April and May, I think they can swallow a little more Palm.

maybe its a suckers trade, but I stepped in down near support on Friday to get long. Rallied to $14 by the bell, bought in at $13.79. My stop will be very tight here--overall market strength could be a concern early next week and although buying was strong around $13.8 all day Friday, a break through that area on high volume and this likely goes to the next suport level around $12.20ish. But, worst case scenario, Palm revisits the 200 DMA which currently sits around $11.25...sure that would be a 20% drop from $14, but it would also be a heck of a buying opportunity. If the market stays sideways or upward Mon-Tues, Palm will trade back close to $15 on the momentum of the report and buyers of the secondary. My sell target is $14.72, long 1200 @ $13.80

Sep 19 05:17 AM

[meta9999:]

Derek,
I'm glad you made some money on PALM, hopefully out at 14.72 or better. The problem with your analysis is that you're using technicals on a manipulated stock. Goldman has kept the price high so that the secondary could be priced at the top end of the recent range. Wait until after the secondary offering is completed, you'll see the stock plunge. Bottom line is that while PALM is a distant third in quality, they simply can't make money on this product. They're too late to the party, the big margins are gone, and the R&D to keep competitive will eat them alive. PALM will be under $5 a share a year from now, and they'll blame it on the economy.

Oct 03 04:40 AM