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Palm Surges, But for How Long?

It's raining money at Palm, as the decision to move Ed Colligan out of the CEO's job apparently has unlocked even more shareholder value, to the tune of another 8 percent today, on top of a big percentage gain a day earlier. About $11.50 at the beginning of the week, and comfortably north of $14 this morning.

Palm Pre
palm.com
Palm Pre

You can thank the one-two punch of Colligan's ouster and fresh rumors of a Dell take-out for this rally. Which is normally a red flag for me as "action away from the ball" rather than the game itself.

Takeover rumors responsible for the lion's share of a stock's move is a shareholder's version of playing with financial fire. Just as beleaguered and bewildered investors in Yahoo still pining for a deal with Microsoft.

Colligan's departure has a little more meat on the bone since executive chairman Jon Rubinstein, who some tell me has largely been running the show for the past year anyway, will continue to focus his team on execution and innovation.

But the real issue for Palm , and Rubinstein, and the company's legions of investors who are strapped in for this rocketship ride, is whether its surging stock is more a case of irrational exuberance. JPMorgan is out with a report that says Palm sold 100,000 Pre smart phones so far. Not bad. But in this what-have-you-done-for-me-lately kind of Wall Street world, it'll come down to whether Palm can keep that sales momentum going.

With Apple's new iPhone 3Gs coming next week, and new handsets from Research in Motion, and Nokia continuing to see broad adoption in the Far East, that momentum issue becomes topic 1 for Rubinstein. And it should also be topic 1 for investors.

Obviously, Colligan's departure has been planned for some time. I'm sure Palm didn't want the distraction of a management shake-up to overshadow its make-or-break Pre release. That'd be the optimistic way to look at it. The pessimistic side of things might suggest that the his job was on the line depending on Pre's first weekend sales performance, and maybe it didn't measure up, and that's what led to his sudden departure. I'm inclined to believe the former, rather than the latter.

But again, fundamentals should outweigh that action away from the ball, and these shares, as I have written before, simply don't reflect reality when it comes to the business model at Palm. And while investor sentiment is all about what happens next as opposed to what's happened before, as they bet now on a big pay-off some time in the (near) future, Palm's past has to be taken into account.

If this company were a consumer, instead of living off its wages, or even trying to survive paycheck to paycheck, Palm instead has been surviving only by dipping deep into its savings, in the form of the $400 million or so from lead investor Elevation Partners that continues to infuse this company with cash.

Maybe those bridge investments were actually enough to spark the kindling and the company can now sustain itself. Maybe. In the meantime, its got Microsoft and Google to worry about as well. I'm not saying things you, or even the company, don't already know. But you wonder how these enormous issues can fade far enough into the background to justify such a huge move to the upside by Palm shares.

Does a deal with Dell make sense? As I mentioned on the air yesterday, it made a whole lot more sense in January when Palm was at $3, or even $7 in the wake of the Pre debut. It also made more sense when Colligan still at least had the appearance of running the show.

Now, in Rubinstein, Palm has a CEO who may not see his next career step as a general manager running Dell's smart phone division. And yet Palm shares continue to climb at least in part on that speculation.

Palm's intriguing, don't get me wrong. The question for investors is whether there's any more upside left in these shares after a week like this one, or as a possible one-hit-wonder-take-over-target, Palm's finest days are already at hand.

Questions? Comments? TechCheck@cnbc.com

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