Palm’s reduced guidance rewards shorts

The smart phone battle is not going Palm's way. What should investors do now?

By Jamie Dlugosch Feb 26, 2010 12:05PM

Palm (PALM) shook investors yesterday by significantly reducing revenue guidance for 2010.


Stating the customer adoption of its products was happening slower than expected the company now expects third quarter 2010 revenue of $300 to $320 million. The prior estimate was for revenue of $430 million for the same period.


(Here's how I suggested playing the smart phone wars)


Imagine that, customer adoption in an intensely competitive market with heavy weight leaders Apple (AAPL) and Research in Motion (RIMM) unwilling to yield in any way shape or form.




While Palm products may be similar or in some cases better than others, the perception is that I-phone and Blackberry are significantly superior products. They are the leaders and everyone including Palm is chasing them.


Some of those chasers are quite impressive in and of themselves including Google. The smart phone game may only be in the first or second inning, but the winners in the game can be easily determined.


Palm is not on this list of winners and today’s reduced guidance is only the beginning of the pain for Palm investors.


Occasionally picking stocks to buy or sell is like shooting fish in a barrel. The future path of a company can be plain as day. When that happens investors should pounce as I suggested with my short recommendation of Palm in mid-January.


Shares were trading at $13.50 at that time with a valuation that suggested that Palm was going to be one of the winners in the smart phone race.


My disagreement with the market valuation was simply that Palm was not going to be one of the winners. Frankly, I did not see where a Palm product held any advantages that would allow the company to be on the same playing field with the current leaders.


Ultimately Palm will be relegated to being a duplicator instead of an innovator and leader. Sure there is money to be made as a duplicator, but the duplicators tend to be cheap copies with lower profit margins.


The mistake the market was making in January was in rewarding Palm with a premium valuation. Instead what will shake out for Palm is that the company will be faced with a decision to chase the leaders with lower prices.


Sure revenues may increase as a result, but at a cost of lower profits if any. Is it worth speculating on the long side of this story? I would not and neither should you.


Instead I would consider these top 10 stocks for 2010.


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