Why I am shorting PALM.

Palm is currently very close to a 52 week high, and I can’t figure out exactly why? It seems to primarily be related to short covering related to unfounded rumors about a takeover by Nokia.

Certainly a takeover would result in a jump in the stock, but very little else would.

As a device, the PRE is supposed to be pretty good.  Essentially the same functionality as a Iphone in a much cheaper looking and feeling package and without a thriving app store (Ultimately, it seems that, like with MP3 players, software superiority will insure Apple’s market share even once competitors eventually start producing equivalent or even superior hardware.)

Sales of the PRE have been OK, but not great (seems to have been about 600,000 for the quarter) and are slowing considerably - PALM is projecting a dramatic drop in sales this quarter.   It seems the people who still have Sprint- which is pretty clearly the worst, but cheapest of the major cell carriers- are mostly people who don’t want or need smart phones.  Those who were interested have already bought. To put this in perspective, the Iphone 3GS sold 1,000,000 units in its first weekend.

The company has responded by cutting the price substantially - down from $200 to $149 last week, and now down to $99 on amazon and $79 at Walmart with an accessory bundle.  The company is coming out with a cheaper version - the PIXIE - soon.  The rumor was that this would be priced at $99, but it seems that the price will have to be lower than the PRE if they want to sell any of these units.  So this device will likely sell for $0 to $50 with a 2 year.

So it seems that’s PALM’s margins and sales are not what they or the market had hoped for.  The company has lost money for each of the last 10 quarters, and current trends make it unlikely this will any time soon.  Presumably they will lose a little less per sale after their dilutive stock offering last week.

Supporters of PALM point to a jump in sales once the PRE is available in other countries and with other carriers.  I wouldn’t hold my breath for this to happen.  The PRE has been pushed hard by Sprint - who had few other decent phones.  Verizon has a plethora of blackberries - some of which are pretty good phones.  In addition, there are rumors that Apple is in discussions with Verizon to sell the Iphone or some new device.  If and when this happens, PALM little run will be over.  While there is always a contingent of Apple haters and people who like to be contrarians, the vast majority would chose the Iphone if they had the choice of these two devices on the same carrier at prices that were relatively similar.

So, the only likely upside seems to be acquisition.  Various names have been circulating over the past 6 months, most prominently Dell and Nokia.  Dell just made a rather large acquisition, so they probably won’t be interested.  The Nokia acquisition makes some sense.  They haven’t been able to make a decent, reasonably priced smart phone.  The N95, and its successors have been most notable for having good cameras and high price tags.  But it doesn’t seem that Nokia realizes their weakness.  They have been working on new relationships with Microsoft and they have invested heavily in their own software.