Do $Palm shareholders risk going home empty-handed?

Those that have known me and listened to my advice over the years know that I am not a big fan of Palm [stckqut]palm[/stckqut].  Now it looks like the Wall Street Journal is agreeing with me that this company may be on its death bed.

Aside from the fact that they cannot generate a profit (a sin in my opinion for a public company), their lack of growth over the years is atrocious. Only a speculator or a gambler should consider this a company to invest in. For those that want a company that you can CONFIDENTLY invest in - STAY AWAY FROM PALM!

You can click here to read more (may require a subscription) but below are a few highlights:

Some investors see a buying opportunity in the stock of the mobile-device maker, after a 55% plunge over the past six weeks amid weak sales of its new Pre smart-phone. Despite doubt about Palm's ability to gain traction in the fast-growing and increasingly competitive smart-phone market, some are betting Palm will get acquired.

Even if such a deal materializes—far from a sure thing—it would have to do so quickly to justify the current stock price of around $6. The way the business is trending, six months from now, any buyer may only pay enough to cover Palm's $388 million debt and the $376 million in preferred stock held by Elevation Partners. Common shareholders may get next to nothing.

Of course, it would depend on how many bidders show up. Palm's most valuable asset, particularly for a new entrant to the smart-phone industry, is arguably the research and development sunk into the webOS operating system in the Pre. It is reasonable to assume that figure is around $600 million—what Palm has spent on R&D since 2007, when it last released a phone running on its old operating system. There also are carrier relationships, and Palm's fading brand name. But absent a competing bidder, Palm may struggle to fetch more than one-time sales, which Morgan Joseph analyst Ilya Grozovsky estimates will be $1.2 billion this fiscal year, ending in May. That translates roughly to the current stock price.

What is more, Palm's cash reserves will likely shrink in the coming months. Palm said last week it expected to finish February with $500 million in gross cash and equivalents, down from $590 million at the end of November. Assuming it continues to burn cash at this rate, it will exhaust its reserves in 18 months. Spending more on marketing could accelerate that.

Raising more cash from the public would be tough. After all, investors won't soon forget that Palm sold shares at $16.25 last September, shortly after issuing the fiscal 2010 revenue projection that, it is now clear, was overly optimistic.

Palm may very well get acquired. But investors shouldn't bank on a big payday.

3 Comments

  1. You beleive there is more downside I definitly agree I saw the stock go from the one dollar low to 15 in three months you think there is more downside long term what about near term?

  2. Author

    I believe there is a very significant risk with PALM.

  3. Downside is exhausted, extremely oversold- time to buy, shorts are going to cover into earnings.

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