The Palm Controversy

excerpt:


"Broad Street approaches Palm with a long term view.

"Not quite six weeks ago Palm raised $373 million at $16.25. The institutions who took down this offering were well aware of the launch of Android, the Nokia phone, and the other challenges sited by tardy analysts. They know Palm sold 33% more phones than the street expected, 800,000 vs. 600,000. They know sales have slowed.

"Our attention was first drawn to Palm with the arrival of investor Roger McNamee and Elevation Partners. Roger is sometimes referred to as "the hippie who turned around Apple." McNamee is a successful venture capitalist; he's also guitarist in a jam band. If you follow Moonalice you will find the same signature McNamee brought to Apple and now to Palm: earning loyalty from a niche community over the long term. McNamee has a long horizon, and he knows his audience. Elevation, Palm's biggest investor, bought another two million shares at $16.25.

"Some people are annoyed by the New Agey female friendly Palm Pre ads but McNamee understands Palm needs only a small percentage of the overall market to be a success. The Pre is still early in its product cycle with a world of apps on the way as well as expansion to other carriers and other countries. Analysts worry that Palm products have slipped behind Apple, Rimm and Google in the eyes of the major distributors and telco partners. But Palm never planned to dominate the sector, a sector so large that the niche Palm serves can provide plenty of profit.

"Palm's upcoming launch of the $99 Pixi has some analysts prognosticating further erosion to the Pre. We are reminded of analysts who feared the iPod Mini would undermine the product line. Pixi could be a surprise success this holiday shopping season with its affordable price and girl friendly design, but it doesn't have to be a hit to forward Palm's progress.

Palm is the only smart phone pure play. This may prove tempting to Dell, HP, Microsoft, Nokia and other major players seeking a boost in the sector. The stock's current enterprise value (around 1.5 billion at $10.50 per share) and the amount of cash these larger companies have may act as an embedded put option.

"As the market seeks direction there is much volatility in Palm. The large short position guarantees momentum swings up and down. The stock market remains vulnerable to threats from residential and commercial real estate mortgage failures, consumer weakness, and a pervasive atmosphere of apprehension. We believe Palm has the cash and the long term marketing plan to navigate these treacherous waters. Patient investors with an appetite for risk should consider accumulating Palm shares under 12.

http://www.broadstreetview.com