Palm: Looking at Going Long

| About: Palm, Inc. (PALM)

There is no question that Palm (PALM) has recently been hit by growing competition in the Smartphone industry. New competitors in the field such as Motorola (MOT) and Nokia (NYSE:NOK) are locking into fierce competition with existing Smartphone companies such as Palm and Research in Motion (RIMM). Competition is growing and prices are dropping; according to the President of the Motorola Mobile Division, the Motorola Q may sell for as low as $50 by year end.

PALM recently provided weak guidance for Q4 of revenues in the range of $430-$450 million vs. $472 estimates, and barely beat already lowered Q3 estimates. This weakness may suggest PALM is hurting from its forced price competition.

Yet, at $15.61, PALM is still down almost 35% from its April high of around $24. Even with the tempered outlook, PALM may pose as an attractive investment at these levels.

Although competition in the industry is rising, overall Smartphone growth should rise rapidly as companies begin to focus their models toward consumers. Further, with Smartphones expected to represent more than 25% of all mobile phones sold in 2011, PALM stands to benefit from the increased consumer distribution.

PALM announced a $250 million buyback in September, which represents more than 15% of its market cap. Such a large buyback should work to prop the stock up and limit further downside.

Lastly, it is no surprise that PALM has long been rumored to be a potential takeover target. With its exposure in the hot Smartphone market, and relatively cheap valuation, PALM could be a prime candidate for a larger company or a private equity firm.

Back in February, Mark Nelson, who at the time had an 8% stake in the company, wrote a letter to the company expressing his view as to why the company should sell itself to a larger firm like Dell Inc. (NASDAQ:DELL) or Hewlett-Packard Co. (NYSE:HPQ). Recently, the idea was thrown around as a September 20th report by ThinkEquity Partners speculated that the Motorola buyout of Symbol technologies increases the likelihood that another major company sees the value in PALM.

Recent price action may reflect the increased likelihood of PALM beating its lowered estimates when it reports Q4 results in December, and renewed buyout speculation. Over the last several months, PALM appears to be building a solid base around the $14 to $15 price range. The stock has continued to register higher lows and higher highs since mid August when PALM bottomed out around $14. With the stock now firmly above, and finding support at its 50-day moving average at just over $15, a good entry point may be near.

Disclosure: I have a small long position in PALM

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