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A Tail of Two: Apple Ahead, Palm the Rear

RBC's Mike Abramsky has an interesting research report out this morning about Apple and Palm. And it's compelling stuff because of Abramsky's past calls on both these companies.

He was late to the Apple party, but once he got there, he was one of its most thoughtful and celebratory revelers. With Palm, he has always tried to make the case that the opportunities there far outpaced its stock price, which in my estimation was already way too high for the returns it could truly deliver.

Today, his reasoned analysis says one is ready to accelerate while the other may have peaked.

Guess which is which?

Let's begin with Apple , since RBC's proprietary data suggests pent up demand for the oncoming iPad. The firm cites its RBC/ChangeWave survey data of 3,200 folks between Feb 1-10 that shows 13 percent of respondents are interested in buying an iPad, and while that might seem small, consider it's above the 9 percent interested in iPhone before its 2007 launch.

"While we do not expect feverish initial launch lines like iPhone, the data portends well for healthy initial iPad uptake," says the report.

Part of the reason? Apple's aggressive pricing, perceived to be at a kind of consumer "sweet spot."

"Only 8 percent appear unwilling to pay Apple's indicated iPad prices. That's below the 28% who balked at initial iPhone pricing," says Abramsky.

He adds that "it appears that the iPad's lack of Flash support, camera, multi-tasking does not appear to deter initial buyer interest."

Most importantly, RBC maintains its "preliminary estimate for 5M iPad units CY10, $2.4B rev and $0.33 EPS (not yet in our formal F10/F11 EPS). iPad offers some cannibalization; 25 percent of planned iPad buyers may delay purchasing one or more of Apple's other products (e.g. Macbook, iPod). Scenario Analysis suggest iPad EPS accretive to CY10 at $0.07-0.59, based on 20-30 percent cannibalization.

"This data, while preliminary, suggests iPad may have greater potential than expected, to expand Apple's addressable PC, iPod markets and to capture a segment of the home PC market (est. 35M+ units/yr). Stronger than expected early iPad momentum may be a catalyst for valuation."

A decidedly different tune at Palm . While RBC still rates shares an "outperform," Abramsky is taking his target down from a frothy $25 a share to $18.

The firm is tracking a more "gradual" ramp of Palm's relationship with Verizon. Because of that, "We are trimming Q3/Q4 webOS units to 1.1M and 1.35M (1.3M, 1.7M prior), our F10 estimate to 3.8M (4.3M prior)."

RBC still calls WebOS "superior," but concedes it faces an "awareness" challenge and it all translates into estimates toward the low-end of guidance. Says RBC: $1.6B revenue, in our view, remains achievable. Our F10 estimates are $1.6B, -$0.78 ($1.8B, -$0.40 prior) and F11 estimates are $2.7B, $0.14 (prior $2.9B, $0.38).

Most importantly, RBC's "positive thesis remains. Though slower than expected, Verizon's launch (and pending AT&T) remains significant milestone for awareness and distribution, positive for LT upside. Palm's unique software abilities, ecosystem and vertical integration remain intact, as does its positioning to capture share of the large Smartphone market. One year after launch, webOS sales have achieved 62% of 1st-year iPhone sales, to us affirming sustained differentiation. We forecast Palm achieving 7M units F11 (7.7M prior).

It sounds good, but Palm is still having trouble cracking through. It's not necessarily bad, but I think you'll start to see plenty of reports like RBC's, struggling to bring ridiculous Palm expectations back down to reality. That'll help investors. Eventually. But this company has spent the better part of a year way, way, way ahead of itself. More reports like this one will make Palm taut again, and might offer investors, finally, a realistic opportunity to evaluate these shares.

Meantime, as if I need to bother to write it, Apple continues to hum right along. And Palm is like a bug on its windshield.

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