Investors Should Temper Their Excitement
Judging by the assessments of the technology press and Wall Street analysts, Palm's new gadgets and software platform could be a game changer for the struggling company. Then again, in this desperate market, even the smallest sign of good news can set off a share price run-up. So, while the recent news is worthy of attention, investors ought to temper their excitement.
Of course, Palm bulls might argue that the company is positioned for potentially big gains. Within the next five years, the mobile phone market will grow to be worth $200 billion in sales. If smartphones rise to represent a quarter of that sales number from 13% in 2008, and Palm gets just 5% share of the smartphone market, the company ultimately could be looking at $2.5 billion in annual sales - if it gets things right. (For more, see Great Expectations: Forecasting Sales Growth.)
Market Is Crowded
I'd say that's a big "if". Palm is launching into a crowded market against some of the most innovative tech companies on the planet. Apple (Nasdaq:AAPL) is onto its next generation iPhone. Blackberry maker Research in Motion (Nasdaq:RIMM) has launched its Bold and Storm phones. Nokia (NYSE:NOK), which dominates the market, has a new range of whizzy smartphones, too. Against this sort of competition, it will be tough to make a splash with consumers - at least the size of splash needed to really turn its fortunes around.
Existing Business Declining
Investors need to recognize that Palm's existing business is suffering a rapid decline. Sales at Palm for the first six months of its fiscal 2009, $558.5 million, were down more than 21% from the previous year's comparable period. In its most recent quarter, sales of its Treo smartphones were down to 599,000 units, a drop of 13%.
Following a $100 million capital infusion from its largest single investor,
