Can Palm survive the iPhone?
The smart phone maker is not looking too smart these days. Bankruptcy now a real threat.
The talk now is of a possible bankruptcy and the picture looks bleak. One indicator: Palm shipped some 960,000 units at the end of the third quarter, but only 408,000 ended up in the hands of customers. That leaves significant inventory out there that no one's in a rush to buy.
You can't help but wonder if Palm can survive the phenomenon that is Apple's iPhone, and my view on this dog is unchanged. Sell. Short. Run away. Here's the story.
Back in January I paired a Palm short against an Apple, Inc. (AAPL) long for investors looking to hedge their bets in the market. Palm spent January about $10; it's now just above $4. (Apple's also hit all time highs, so yes, I have to pat myself on the back a little.]
My analysis of the smart phone marketplace suggested that Apple and rival Research In Motion (RIMM), which makes Blackberrys, all but owned this market. It was difficult to impossible to see how Palm could compete.
I thought Palm would bleed in value as a result of the distance between it and the two monsters in the industry. For a pair-trade pick, Palm was easy.
Has the outlook for Palm changed at all? Yes, but for the worse. My suggestion to sell Palm didn't go as far as the bankruptcy some have been suggesting since the warning was issues Thursday.
With approximately 70% its value erased since mid-January, survival is a real and legitimate question.
In the announcement Palm stated that revenue in the fourth quarter would be at $150 million. Analysts had predicted revenue of $306 million. That is a very significant miss and suggests that demand for its products is much lower than the company and analysts anticipated.
Palm says it will work with carriers to deal with that big inventory overhang in the fourth quarter. That means margins will plummet in addition to the revenue drop.
Not good for a company that is burning through cash with multiple quarters of operating losses. While at the moment there is more cash on the balance sheet than debt, that cash will eventually run dry.
The problem for Palm is in finding a new direction. Still Palm likes to think of itself as an innovator, a first mover of new technology. But it pales in comparison to both Apple and Research in Motion. The market perception, anyway, is of a company that imitates not innovates.
That makes it quite difficult to charge top dollar for product. The only path available to Palm, and one it may have no choice but to follow, is low price and high volume.
Palm certainly could become a discount smart phone seller, as it will be forced to do in the fourth quarter. But there's no guarantee that money can be made in that niche.
The market is likely to pressure Palm shares lower in coming days and months. I suspect the bottom of the range will be in the $1.50 to $2.00 cash minus debt range.
Palm might survive, but thriving is at best a long way off. This company is still a stock to sell.
Copyright © 2014 Microsoft. All rights reserved.
Bill Stiritz owns more than 5% of the company, and has experienced an estimated $145 million in paper losses on his investment.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.