Palm investors get chance to see if sales match hype

Palm Inc. investors will get their first glimpse at sales of the Pre smart phone Thursday, as some analysts predict demand may not live up to the hype that drove a 10-fold jump in the stock.



Since dropping below US$1.50 in December, Sunnyvale, California-based Palm has risen as high as US$16.80, spurred by the Jan. 8 debut of the Pre at the Consumer Electronics Show in Las Vegas. Palm, which reports results after markets close, may have sold about 400,000 Pre phones in the period ended Aug. 31, according to Ilya Grozovsky, an analyst at Morgan Joseph & Co.





"That would mean it's not the blockbuster device everybody had hoped it would be," said New York-based Grozovsky, who recommends selling the stock and expects the price to fall to US$7.50, about half the closing price of US$14.66 on Wednesday. "I would assume the Street would be disappointed."



Apple Inc., located in Cupertino, California, sold 5.4 million iPhones in the calendar second quarter, and Waterloo, Ontario-based Research In Motion Ltd. sold 7.7 million BlackBerrys, according to researcher Gartner Inc. In June, Apple cut the price of its cheapest iPhone from US$199 to US$99.



Palm fell 3 cents to US$14.63 at 9:43 a.m. New York time in Nasdaq Stock Market trading. Apple advanced 49 cents to US$182.36, while RIM dropped 92 cents to US$83.24.



Palm's fiscal first-quarter results will also mark Jon Rubinstein's first period as chief executive officer. Mr. Rubinstein, a former Apple executive who got Palm's top job in June, developed the WebOS operating system that runs the Pre.



Predicted Loss



Analysts on average predict Palm will report a loss, excluding some items, of US$35-million, or 24 cents a share, widening from US$12.8-million, or 12 cents, a year earlier. Revenue probably shrank 27% to US$269-million in the period, according to a Bloomberg survey.



Palm Chief Financial Officer Doug Jeffries said last month that he expects the company to be cash flow positive by the second half of next year.



While the Pre re-established Palm as a competitor in the mobile-phone market, the stock has gained mostly because of anticipated demand for the Pre, said Lawrence Harris, an analyst at CL King & Associates in New York.



"It's up on expectations on the Pre, that the WebOS would be some revolutionary operating system and that demand would remain robust," said Mr. Harris, who has a "neutral" rating on the shares. "Demand for smart phones is increasing, but we're also seeing more and more players entering the market."



Palm spokesman Derick Mains declined to comment.



Short Interest



Of the 25 analysts who cover Palm, five recommend buying the stock, 14 say hold and six say sell.



The handset-maker's short interest ratio, a measure of whether investors are betting the stock will fall, was 5.95% at the end of August, compared with 0.99% for Apple and 1.36% for Research In Motion, according to data compiled by Bloomberg.



The Pre allows users to surf the Internet on a touch screen, while using an actual keyboard to type e-mails. The Pre also lets users flip through applications without closing them and search for keywords across multiple programs.



Mr. Rubinstein, 53, joined Palm in 2007 after being courted by Elevation Partners, the private-equity firm co-founded by Roger McNamee. Elevation, based in Menlo Park, California, has invested US$425-million in the company. Mr. Rubinstein, an engineer by training, built WebOS with a team of developers from companies including Apple, Nokia Oyj and Microsoft Corp.



"There are a lot of good engineers there," said Ken Dulaney, an analyst at Gartner in San Jose, California. "The OS is pretty well done."



Sprint Nextel Corp., the third-largest U.S. mobile-phone company, is distributing the Pre. Palm cut the price of the phone last week by US$50 to US$149.99 and at the same time announced the Pixi, a cheaper smart phone to be released later this year.

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