PALM Earnings Preview: Why We Have Low Confidence In This Tech Stock

Palm Inc. (PALM) is set to announce its first-quarter of fiscal 2010 results on September 17, 2009.

Palm had not provided any specific guidance for the first quarter, but expected gross margin on an adjusted basis to be above 30% for the long term. The company also expects operating expense to increase from the fourth quarter level as it starts aggressive marketing of Palm Pre and expansion of product development and sales & marketing capabilities. The company expects to generate positive cash flow in the second half of fiscal 2010.

Although, the fourth quarter was good, with the company beating the Zacks Consensus expectations, revenue declined by 70.7% from last year and the loss increased year over in the quarter. We do not expect PALM to become profitable in the next three to four years. It is also likely that the company will have a tough time delivering strong top-line growth. Additionally, price cuts from competitors will put pricing pressure on PALM.

To fight against competition and gain market share, Palm recently announced a price cut of its flagship smart phone and introduced a new cheaper version of the Pre called Palm Pixi with advanced features. Pixi is expected to be available during the holiday season in the U.S through Sprint Nextel Corp (S). Just after Palm’s announcement, Apple (AAPL) cut the price of its iPod Touch and provides tough competition through its refreshed iPod line.

Moreover, as Palm Pre was launched in June, we expect that its impact will be better reflected in the current quarter. Although Palm has had some initial success due to the media hype, we remain unsure regarding its subscriber base in the coming six-month time frame.

We believe Palm will continue to struggle as it competes against much larger competitors such as Apple, Research in Motion (RIMM) and Nokia Corp. (NOK). The first quarter results will provide a better picture about whether Palm will be able to sustain in front of its large competitors who are eating into its market share by developing competitive products.

We have low confidence on the company’s long-term prospects, and therefore reiterate our underperform rating on the stock.

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