The Palm Controversy

Palm has been one of the great success stories of the Nasdaq recovery until recently, outperforming the market exponentially in a meteoric rise from a 52 week low of $1.14 to a high of 18.09.  But the stock has swooned over thirty percent lately breaking under 12, a technical breach that has many analysts on alert and shorts salivating for more profits.  

The pessimist consensus argues the stock is ridiculously overpriced, the Pre a disappointment that never gained traction, debt prohibitive, competition formidable and in the case of Apple's iPhone downright invincible.  To make matters worse a new 800 pound gorilla has arrived with Google Android.  In short, Palm was a bubble and is doomed.

A Glance at Market Sentiment

Before we examine the reasons Palm remains an investment we hold, and why we view this as a buying opportunity, a moment of attention to the macro environment of the market.   Dow 10,000 was considered a giddy peak of over optimism by many.   Precious metal bulls and other stock bears stridently denounced what they described as a dead cat bounce on the way to a second Great Depression.

Faith in Obama or angry opposition to the administration have become forces in trading as unwise investors attempt to vote with their assets, betting their wealth on emotional reactions to government policies.  As the market tug of war pulls out of the mud first one end of the rope and then the other victories are recorded by both sides.  Gold bugs have seen great gains in the metal and in mining shares.  Obama true believers enjoy gains in alternative energy stocks if they were wise enough to load up just around election time last year.  Enough success stories circulate to feed the cycle.

Obviously if an investor is emotionally attached to the failure of the economy, or to a fantasy of quick and total rebound, the horizon of comfort for investments will change.  For many investors today, from retail to professional, the horizon is short.  Stocks are viewed as seasonal fads, partially the result of money manager window dressing for anxious clients.  Panic is never far from the surface as recent market activity displays.

Broad Street expects neither collapse nor surprise success.  In a future blog we'll take a look at the bigger picture, the complex forces and counterforces influencing the market in the long term.  Here it will suffice to say that we expect careful choice of stocks will reward patient investors.

Broad Street approaches Palm with a long term view.  

Not quite six weeks ago Palm raised $373 million at  $16.25.   The institutions who took down this offering were well aware of the launch of Android, the Nokia phone, and the other challenges sited by tardy analysts.  They know Palm sold 33% more phones than the street expected, 800,000 vs. 600,000.  They know sales have slowed.

Our attention was first drawn to Palm with the arrival of investor Roger McNamee and Elevation Partners.  Roger is sometimes referred to as "the hippie who turned around Apple."  McNamee is a successful venture capitalist; he's also guitarist in a jam band.  If you follow Moonalice you will find the same signature McNamee brought to Apple and now to Palm: earning loyalty from a niche community over the long term.  McNamee has a long horizon, and he knows his audience.  Elevation, Palm's biggest investor, bought another two million shares at $16.25. 

Some people are annoyed by the New Agey  female friendly Palm Pre ads but McNamee understands Palm needs only a small percentage of the overall market to be a success.  The Pre is still early in its product cycle with a world of apps on the way as well as expansion to other carriers and other countries.  Analysts worry that Palm products have slipped behind Apple, Rimm and Google in the eyes of the major distributors and telco partners.  But Palm never planned to dominate the sector, a sector so large that the niche Palm serves can provide plenty of profit.

Palm's upcoming launch of the $99 Pixi has some analysts prognosticating further erosion to the Pre.  We are reminded of analysts who feared the iPod Mini would undermine the product line.  Pixi could be a surprise success this holiday shopping season with its affordable price and girl friendly design, but it doesn't have to be a hit to forward Palm's progress.

Palm is the only smart phone pure play.  This may prove tempting to Dell, HP, Microsoft, Nokia and other major players seeking a boost in the sector.  The stock's current enterprise value (around 1.5 billion at $10.50 per share) and the amount of cash these larger companies have may act as an embedded put option.

As the market seeks direction there is much volatility in Palm.  The large short position guarantees momentum swings up and down.  The stock market remains vulnerable to threats from residential and commercial real estate mortgage failures, consumer weakness, and a pervasive atmosphere of apprehension.  We believe Palm has the cash and the long term marketing plan to navigate these treacherous waters.  Patient investors with an appetite for risk should consider accumulating Palm shares under 12.