Palm Stock Still Seen As Cheap Despite Gains, New iPhone

NEW YORK (Dow Jones)--Palm hopes its cheap smartphone will boost a stock considered cheap by some.

Over the past two years, Palm has seen its value diminished by nearly three-quarters because of failed projects and rising competition - which isn't seen easing with the unveiling this week of a cheaper, faster iPhone - leaving some to wonder where Palm fits in a smartphone world dominated by much bigger competitors.

To some, however, the negatives are priced into a stock valued significantly below its peers. The argument is that with the bar set so low, even a modestly positive performance - which could be helped by Friday'slaunch of its Centro smartphone at Verizon Wireless - could provide a boost to shareholders.

"We continue to view the stock as attractively valued," said Pacific Crest Securities analyst James Faucette.

Palm shares are seeing a boost Thursday on the Verizon Wireless news, rising 12% to $7.05. Possibly adding to the stock's volatility is a sizeable short position. More than 38% of the company's float is sold short, meaning those investors are betting that the stock will fall. With the stock's rise Thursday, investors may be trying to close out those short positions, further inflating the stock's gains.

Nonetheless, even with the gains Thursday, the stock remains significantly undervalued on metrics like price-to-sales and price-to-book value to rivals like iPhone maker Apple, Blackberry maker Research In Motion and Nokia.

In recent quarters, Palm has used its Centro smartphone to carve out an attractive niche market of consumers looking to upgrade from a basic cellphone. With Verizon Wireless, the consumer and price-friendly device is available at the top three carriers.

"We think the product is playing an important role for us in reaching new customers and expanding the audience," said Brodie Keast, senior vice president of marketing for Palm.

The company has also taken several steps to improve its business, including tapping former Apple executive Jon Rubinstein as chairman and lead developer, among other Apple talent, as it looks to accelerate its lumbering pace of innovation.

Centro Vulnerable

That momentum may hit a snag as the Centro runs into the new iPhone.

By slashing the retail price of the iPhone to $199 from $399, Apple is targeting the same kind of consumers Palm has successfully nabbed.

With the lower price, added capabilities, faster network connection and the continued buzz around the iPhone, it's not a stretch for many consumers to open their wallets a little wider to buy the device.

Keast, however, argued that the two devices target different customers. The Centro, with its keyboard and lower price point, provides a better value and is more message-centric, he said. The iPhone is better as an entertainment device, he added.

A core problem for Palm has been the lumbering pace of innovation at the company, along with a myriad of delays on product releases. When Rubinstein took over in October, he warned that a completely new device wouldn't appear for another 18 months.

"Hopefully, being a smaller company they need to be more nimble and outmaneuver their competition," said Hugues de la Vergne. "I don't necessarily see that happening."

Palm is particularly at risk of competitive pressures because it has a limited product portfolio. Other players such as Nokia Corp. (NOK), the global leader in smartphones, has a broader market - primarily overseas - and strong brand to draw upon.

Research in Motion meanwhile, has a lock on U.S. business customers, which Palm also caters to, but not nearly as successfully. Samsung Electronics and Motorola, which has its share of problems, are too large and diversified to feel the competitive pressures of the smartphone market.

Despite pioneering the smartphone market, Palm trails newcomer Apple. As of the first quarter, Palm held 2.9% of the global market for smartphones, compared with Apple's 5.3% market share, according to Gartner.

Palm Undervalued?

Palm's problems - namely, the product delays, limited products and the pressures of increased competition - are at least well known. Over the last year, the stock has been beaten down. It set a new five-year low of $4.21 in March.

As a result, analysts don't see a lot of downside in Palm. In fact, the company later this year is expected to launch several new Treos, another type of smartphone, which could boost sales and push Palm past lowered expectations. Pacific Crest's Faucette has an $11 price target the stock.

Morgan Keegan analyst Tavis McCourt said he believes Palm's current fiscal quarter represents its bottom, and that sales should improve over the next 12 to 18 months. Nonetheless, Palm is expected to report losses for the next two years, according to analyst surveys by Thomson Reuters.

"We assume investors have largely written-off near-term results for Palm, so we are not especially worried about our estimates being below consensus expectations as long as the timing of the new product launches remains consistent," he said.

Indeed, given the growth opportunity in the smartphone market, Palm could see relatively strong growth with its new devices. The company can also continue to tap into its loyal fanbase, many of whom stubbornly cling to their Treos.

Palm expects to pass the 2 million unit milestone for the Centro by then end of this year, Keast said, adding that the product continues to pick up momentum.

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com

(END) Dow Jones Newswires

June 12, 2008 12:43 ET (16:43 GMT)

Posted to the site on 12th June 2008