Palm Battered After Lowering Sales Outlook


Palm (PALM), the onetime handset pioneer, is in trouble. As the smartphone market revs up powered by Apple's (AAPL) iPhone and Research In Motion's (RIMM) BlackBerry, Palm is the odd man out. On Thursday, the company lowered its 2010 sales forecasts for its Pre and Pixi devices -- highly touted models that were supposed to lead the company out of a years-long slump. Palm said sales would be "well below" the $1.6 billion to $1.8 billion the company had previously forecast.

"Broad consumer adoption of Palm products is taking longer than we anticipated," Palm CEO Jon Rubinstein said in a statement. In an effort to goose sales, Sprint, a key Palm service provider, has slashed its retail price for the Pixi by 50% to $49.99, according to Reuters.

'Making New Products Is Hard'

Last fall, in an interview with DailyFinance, Rubinstein acknowledged the challenges facing the company, but insisted the company would succeed. "Making new products is hard," he said. "We're up against a lot of tough competition. But we will be in the top five players in this space."

Palm's troubles highlight the fierce competition raging in the smartphone market, as Apple's iPhone and RIM's BlackBerry continue to see very strong sales. Meanwhile, Google's Android-based phones are off to a great start, putting further pressure on Palm.

That lowered forecast led to a dramatic two-day, 25% decrease in Palm's stock price. After starting the week hovering around $9, Palm shares closed the week at $6.09. After peaking at around $17 last fall, Palm stock has lost half its value in six weeks, and the company's market capitalization now stands at a paltry $1 billion. By contrast, Apple's market value stands at $185 billion.

Company In Play

In a letter to company employees, Rubinstein -- formerly a key force behind the iPhone at Apple -- wrote that company's "softer than expected performance is due to slower than expected customer adoption of our products, which in turn has prompted our U.S. carrier partners to put additional orders on hold for the time being."

Palm's poor performance is a major blow for Elevation Partners, the private equity group which includes U2 frontman Bono. The company has invested some $460 million in the company at an average price of $6.85 per share, and now owns 30% of the company.

The upshot of all of this is that Palm -- long considered a potential acquisition target -- should now firmly be considered in play. But many analysts think the company has farther to fall before a buyer swoops in with an offer.

Analyst Downgrades

For Palm, the problem is simple: people simply are not its products. But Rubinstein seemed to pin some of the blame on Verizon Wireless, saying the wireless giant "acknowledged that their execution of our launch was below expectations."

Several Wall Street analysts responded by downgrading the stock as investors headed for the exits. "We believe Palm's options in a full survival mode are limited, namely lowering price, and increasing marketing and promotion spending," UBS analyst Maynard Um wrote Friday, as he slapped a sell rating on the stock.

Lowering prices and increasing marketing spending are not particularly appetizing options for a company that has lost money for nine straight quarters. Kaufman Bros. analyst Shaw Wu also downgraded the stock, writing "we believe the issues it faces are fundamental in nature and likely ongoing."