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Will Palm Earnings Signal a Buy for Investors?


In just one day we’ll all get to be “palm readers.”  On Sept. 17, smart phone maker Palm (PALM) is set to announce its fiscal 2010 first-quarter earnings.  

The consensus Street estimate calls for a loss of 24 cents per share, even worse than the 12 cents per share the company lost in the same quarter one year ago.  

Last quarter, Palm reported a loss of 40 cents per share, much better than the loss of 62 cents per share anticipated by Wall Street.  Palm stock surged on the earnings news last quarter, and indeed, Palm shares have delivered an incredible 382% gain year to date.  

With that kind of unsustainable run higher, I expect the proverbial shoe to drop on Palm shares.  I think Palm could be dead money here — and that’s despite some rather positive news regarding its new Pre smart phone.  

According to a recent ChangeWave Alliance Research Network survey of smart phone owners, the Pre’s satisfaction rating is exceptional for a new product release. Nearly half of Pre owners report being very satisfied with their new smart phone.  To put this in context, Research In Motion’s (RIMM) BlackBerry and Apple’s (AAPL) iPhone are the only other smart phone manufacturers to attain such high satisfaction ratings.

Unfortunately for Palm, customer satisfaction ratings do not make a company profitable.  Palm will have to sell a whole lot more Pre smart phones before it can climb back into the profit zone the way Research In Motion and Apple have.  Indeed, one of the many obstacles to Palm’s long-term recovery is the very stiff competition the company faces from the BlackBerry and the iPhone.

The reality for the Sunnyvale, California-based Palm is that it’s up against two highly capitalized industry giants along with a slew of lesser competitors, and it will take world class marketing and a huge advertising budget for Palm to compete successfully in the high-end smart phone market over the long term.

Now to be certain, there is a wide range of opinion on Palm. Some say the company is back from the brink, while others say it’s a dead company.  I suspect Palm will survive, but it may not be profitable for three to four years.

I think we are liable to see Wall Street traders very disappointed by Palm’s numbers tomorrow, and if that happens, you are going to see a big sell-off in the shares.  If you are long Palm, then I think you should seriously consider taking your winnings off the table.  If you are considering Palm for some new money, my advice is to reconsider.

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