After losing more than one-third of its value during October and the early part of November, shares of smartphone handset maker Palm (Nasdaq:PALM) have been on a tear lately, picking up almost 15% over the last few trading sessions.
IN PICTURES: 20 Tools For Building Up Your Portfolio
Stock Jumps on Takeover Speculation
Bullish sentiment on the stock has been fueled by a combination of upgrades from analysts and resurrection of speculation regarding the possibility that the company might be bought out by a stronger player in the global cellphone market.
Topping the list of potential suitors is industry giant Nokia (NYSE:NOK), which has seen its share of the smartphone market erode as consumers continue to bypass the company's smartphones in favor of more tech savvy offerings that provide a more compelling online experience to users. Buying Palm would give Nokia immediate access to a technologically superior product line, but it wouldn't lead to a big boost in market share, at least not right away. And despite the recent sell-off, the shares still look too expensive. That's why the majority of analysts dismiss the idea outright.
Palm Remains a Small Fish in a Big Pond
Despite being the first out of the blocks with a smartphone offering back in 2002, Palm never was able to gain much traction in this highly competitive market and remains very much a David among the Goliaths in the industry. Even if the company manages to meet all its sales targets, it will still only hold an almost irrelevant 5% sliver of the global cellphone market.
Palm's Strategy: Bet The Farm
Meeting those targets now rests on the success or failure of another bet-the-farm move by the company based around the launch of a new handset, the Pixi. The Pixi now faces an uphill battle in a market that still seems to be infatuated with Apple's (Nasdaq:AAPL) iPhone and more recently intrigued by Motorola's (NYSE:MOT) new Droid smartphone, which sports similar touch screen razzle-dazzle as the iPhone, but is powered by Google's (Nasdaq:GOOG) Android operating system.
Analysts' views on how well the Pixie can do remain divided, with some seeing unit sales potential as high as three million - an earlier record Palm achieved with its Centro handset - while others see a repeat of the underwhelming sales currently being experienced by Palm's flagship Pre smartphone.
As with any smartphone, much will depend on whether and when major mobile service providers take up the Pixi.The bullish camp was recently bolstered by buzz that major telecoms Verizon (NYSE:VZ) and AT&T (NYSE:T) are planning to sell the Pixi starting next year. But with its major commitment to the Droid, which appears to be selling well, it's unclear how much effort Verizon would put into pushing the Pixi. Ditto for AT&T, which would have little incentive to shift its allegiance from the iPhone. A lack of adequate marketing by Sprint (NYSE:S) has been seen as the reason behind the Pre's disappointing sales.
The Bottom Line
Based on fiscal 2011 consensus earnings expectations, Palm currently sports a forward multiple of over 30 times. That's well ahead of the comparable forward multiple of 22 times for smartphone leader Apple. That strikes me as too rich a valuation to appeal to any potential suitor for Palm, especially when all they' ll be getting is a bit player on the smartphone stage. (To learn more, see Dialing Up Choice Telecom Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
