After the hype, a supremely negative take on the prospects of the eagerly awaited Palm Pre smartphone and the company itself from Collins Stewart analyst Ashok Kumar today.
Mr Kumar says his supply-chain checks indicate that “due to multiple hardware and software issues, Palm has dramatically reduced its production orders” with its manufacturing partner.
The smartphone is due to launch in June and Wall Street is expecting 1m units to ship in the second half. However, the analyst says this is a “highly unrealistic” figure.
Also counting against the Pre is slowing growth of smartphone sales, down to an estimated 5 per cent this year from 53 per cent two years ago.
Mr Kumar points out the field has become very crowded and only Apple, HTC, Nokia, RIMM, and Samsung have critical mass. Palm is “unlikely to have the scale and scope to be a player long term. This will be a key stumbling block in signing on additional carriers,” he says.
Sprint is Palm’s only major-carrier customer to date for the Pre in the US and operators in Europe have been adopting a wait-and-see approach.
“If Sprint does not match or beat AT&T’s subsidised iPhone price of $199, which translates to a subsidy in excess of $200, the Pre is DOA [Dead On Arrival],” he concludes.
As for Palm itself, the analyst says higher marketing costs for the Pre platform could significantly increase its cash burn, which was around $90m in the last quarter. “With only $220 million in the bank, time runs out in two quarters.”
Finally, he does not view Palm as an attractive takeover candidate: “Their crown jewel is the OS, but the smart phone industry is migrating away from closed to open platforms. As such Palm is on the wrong side of the fence.”
Palm shares, which hit a low of $1.42 in December, have reached $10 this month on the back of takeover rumours and the announcement of the Pre in January, but Mr Kumar says the valuation is untenable.
However, others disagree. Bank of America raised the stock to a “buy” last week and its target price to $14 due to its confidence in the Pre’s prospects.
There may be some wiggle room for Palm and Sprint on price as well. The research firm iSuppli said yesterday the Pre cost $170.02 to make, including hardware, manufacturing and software and IP licensing costs, according to its estimates.
“The use of a multi-touch screen—a key allure of the iPhone—and Palm’s innovative WebOS operating system, are likely to allow the Pre to appeal to a broad range of consumers, going far beyond the company’s core group of business-oriented customers,” said Tina Teng, senior analyst, wireless communications.
There was also speculation today about a second Pre-like device from Palm launching in the autumn.
Whatever the excitement around the devices, the story unfolding of whether Palm can pull off an outrageous comeback or fail disastrously is the real page-turner here.
