Palm Gets a Boost From AT&T Deal to Offer Pixi, Pre

Palm (PALM) shares popped Monday morning after the smartphone maker announced a deal with AT&T (T) under which the telecommunications giant will sell Palm Pre Plus and Palm Pixi Plus devices. Shares of Palm rose as high as $4.23 a share in intraday trading, up nearly 5.8% over their close on Friday.

The strong reaction of the stock, however, is somewhat peculiar given that Palm's pending deal with AT&T had been its worst kept secret.

If anything, investors may have been issuing a sigh of relief that AT&T has chosen to stand by its new partner at a time when Wall Street has panned it. Some analysts cut their target stock price for Palm to zero last week following its poor third-quarter earnings and dire fourth-quarter revenue outlook.

Under its partnership with AT&T, Palm will make its webOS smartphones available through the telecommunications giant in the coming months. The Palm Pixi Plus is expected to sell for $49.99 and the Palm Pre Plus for $149.99 with a two-year AT&T service contract and a $100 mail-in rebate. The pricing and terms for the Pixi and Pre are similar to the deal customers can receive through Verizon (VZ) and Sprint (S).

AT&T May Be the Future of Palm -- If It Has a Future

When Palm reported its earnings last week, it noted it had shipped 960,000 phones in the quarter. But unfortunately for the vendors and carriers who purchased the phones, only 408,000 phones -- less than half -- were then resold to John and Jane Doe consumer. That means these vendors and carriers -- Palm's direct customers -- may not be in the market for new Pixis and Pres for an extended period, noted analysts.

One analyst, Tim Long with BMO Capital Markets, said in a research note after Palm's earnings announcement last week that he thought AT&T would seek to delay the launch of the Pre and Pixi Plus.

Given all that, the joint Palm-AT&T announcement may have given Palm's investors some much needed reassurance. Long, in his research note, said he expects AT&T to provide the struggling smartphone maker with most of its revenues in the fourth quarter.

But Palm's windfall from the AT&T deal may be tempered, noted Deepak Sitaraman, a Credit Suisse analyst.

For starters, Palm's fiscal fourth-quarter revenue projections of $150 million likely already take into account sales to AT&T, said Sitaraman in an interview Monday.

The full benefit of the AT&T deal is not expected until Palm's fiscal first quarter and beyond, he added.

"While adding AT&T as a carrier is positive, our expectations for sales at AT&T are modest," Sitaraman said. He noted that AT&T is offering the same smartphones as Verizon and Sprint, which already have a jump on making them available to their customers. On top of that, the Palm Pre Plus, with its nearly $150 price tag, is less competitive than Apple's iPhone 3G 8GB, Motorola's Android-based Backflip or the Blackberry Curve 8520, which sell for slightly just under $100.

In an earlier research note last week, Sitaraman said, "While there is one last major carrier launch yet to come (AT&T), we don't believe that launching the Pre/Pixi at AT&T will be sufficient to alter the current trajectory, given Palm will be the 4th platform at AT&T (after Apple, RIM and Android)."