Giving Palm Credit Where Credit is Due...To a Point

There's no question Palm's quarterly report surprised investors by beating the Street. With expectations already so high, you'd have thought Palm shares were already priced to perfection.

And Palm exceeded those expectations.


The company reported a loss of 40 cents a share when Wall Street was looking for a loss closer to 65 cents, on $113 million in revenue. Topline consensus was $81 million. (Incidentally, Thomson is still poring over these numbers because of some accounting issues, and I butchered Palm's numbers when they were released, in part, because of that. Which hopefully didn't take away from what should have been a nice moment of glory for Jon Rubinstein and team.)

The company's sell-through was equally impressive, with 460,000 units versus the 450,000 expected. Margins were up, cash was up, unit sales beat, business customers are snapping up the new Palm Pre at a higher rate than Palm anticipated (hear that Research in Motion?), and across the board, this was more optimistic and positive than this company has seen in years.

That's the good news and shares rallied, as they should.

Well, "should" if they already hadn't jumped almost 400 percent since the beginning of the year.

And that's why I say "credit where credit is due," but only to a point. I don't argue the growth potential of this company, something Rubinstein himself pointed out on the conference call with analysts, saying that smart phone penetration had reached only 11 percent globally and 19 percent in the US, and expected to double by 2013. Clearly, said Rubinstein, there's room for three to five winners, which I completely agree with.

At the same time though, analysts on the call seemed to agree, and Palm execs said, that the company didn't expect to be cash flow even -- let alone cash flow positive (non-GAAP), until the second half of 2010, and therefore not profitable until then. In other words, another year of more red ink, and that's assuming the company is able to scale manufacturing to meet demand, and has enough cash to do so, with Palm saying on the call that it expects operating expenses to increase as it ramps up marketing and other expenses connected to the Palm Pre.

Palm Pre
Palm Pre

And speaking of the Pre, Palm wouldn't break out sales of the device, which wasn't much of a surprise since it has tended not to break out individual products. Still, in the wake of Apple's million-unit iPhone 3GS weekend, you'd think Palm would announce some number to appease investors desperate for positive metrics.

Which brings me to my point. Palm had a strong quarter, all things considered, based on estimates by analysts. The company dug a deep hole for itself and has begun the long process of digging itself out. And it's very possible the company is digging itself out faster than the experts expected. Even still, the red ink will continue, Palm only has the Pre and Treo Pro to speak of, and one quarter is hardly a trend. And the company will not offer any meaningful guidance.

This company went from a market cap of $400 million in January to over $3 billion today. That's enormous wealth creation on the back of a single product and no real track record of execution. I have no problem "investing" in a company's future, but with that kind of market share increase, investors are putting crushing pressure on this company to perform in a way almost no other company has.

That's not to say Palm isn't up to the task, or that Rubinstein can't rally his team. It's just that Palm hasn't in the past, and that should very much play a role in investor confidence today. Maybe a quarter or two, or three or four more of steady improvement can justify the enormous exuberance in Palm stock.

For now, Palm should celebrate a better than expected quarter and appreciate that it appears to be on the right track. How fast Palm travels on that track, and whether it can even stay there, is still open for debate. Looking at the action in these shares, based on one quarter, and essentially one product, still makes Palm -- at these levels -- more a gamble than an investment. At least today.

Questions? Comments?