Palm Is Trading On Hype And Remains A Very Risky Investment

One of this year’s hottest stocks has been Palm (PALM). Yes, the Palm that made PDA famous.

Last fall, shares of the company could have purchased for about $1.50 per share. On Friday, the stock closed at over $10. Year-to-date, PALM’s return puts it within the top 1% of all stocks within the entire Zacks Rank universe.

A very impressive run. Unfortunately, the strong upward move is based on hype.

Last November, Palm unveiled its next generation operating system, WebOS, and its next generation phone, the Pre. Overnight, buzz emerged that the Pre would unseat Apple’s (AAPL) iPhone at the top the smartphone market.

There is one small problem, however. Hardly any third-party has gotten to use the phone without a Palm representative standing no more than a few feet away. More importantly, not a single well-followed tech reviewer has tested the Pre. For all anybody knows, this thing could be a complete disaster.

Don’t get me wrong, I have high hopes for the Pre. I currently use a Motorola (MOT) smartphone that runs Microsoft’s (MSFT) Windows Mobile operating system. I thought having a smartphone would make me more productive; quite the opposite has happened. I have spent countless hours trying to fix the problems caused by Windows Mobile.

A smartphone that can keep up with me would be a blessing. The iPhone is probably that phone, but I want a physical keypad. The Pre has one.

But I wonder why Palm isn’t letting third-parties review the phone. After all, if the Pre truly is a next generation smartphone, then wouldn’t Palm want to show it off? (Message to Palm: get me a Pre to demo and I’ll blog about it.)

Then there is the app [application] issue. Part of Apple’s success is that there are thousands of apps for the iPhone. So many that Research In Motion (RIMM) recently launched its own app store for the Blackberry. However, there is more to it than just having an app store. The operating system has to be popular enough to get developers to write for it. Google (GOOG) is finding this out with its Android system.

None of this even factors in Palm’s fundamentals. The balance sheet is a mess (liabilities exceed assets), the company is burning cash and revenues continue to fall.

Essentially, the current stock price reflects an expensive call option on whether the Pre will be a blockbuster.

And then there is the U.S. carrier. Sprint (S) will have exclusive rights to sell the Pre. This morning, Sprint said that it is continuing to lose customers. Will subscribers come back to Sprint just for the Pre?

This last question is perhaps the biggest. The Pre could live up to the hype from a technology standpoint but fail to generate a large following. Such a scenario would be nightmare for Sprint and put Palm in a tough situation. Perhaps a merger partner could be found, but Palm also would run the risk of going out of business.

Anyway you look at it, Palm is trading on hype and remains a very risky investment.

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Comment by sffssf

2009-05-19 16:33:13

srfsf

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