Tuesday, January 5, 2010

PALM-Wider Reach Should Breathe New Life Into Palm Story

$PALM-Wider Reach Should Breathe New Life Into Palm Story

There is an Overweight rating and $14 price target as new carrier
distribution in 2010, following the expiration of Sprint
exclusivity should boost unit shipments and subscriber
adds, thereby jumpstarting greater support among
developers for webOS. We then expect the resulting
deeper application environment to attract still more subs
allowing Palm to bootstrap itself to relevance.

The underlying thesis is a strong belief that smartphones
have more in common with the video game
console market, where new platforms enter and take
share every 2-5 years, than to the duopoly PC market.
Inherent in our thesis is that PALM’s webOS
product is uniquely differentiated such that if it were
not for its lack of distribution, inadequate advertising,
and resulting limited developer community, PALM would
be shipping far higher unit volumes than it does today.

Our base case for Palm assumes only 2.5% global
smartphone share in F2012 (8.5% in the U.S.) leaving
substantial room for upside should carriers and
developers truly embrace the webOS platform.
Risks to Our Call: Given Palm’s “restart” business plan,
we view the stock as a somewhat binary option on the
smartphone market. Therefore, if Palm cannot generate
a critical mass of users and sufficiently interest apps
developers, it may not achieve the necessary
momentum to become a serious player in the smartphone
market leading to high operating losses and the
need to curtail either R&D or marketing by mid-F2011.

Valuation: At our $14 target, Palm would trade at 13.0x
normalized EPS of $1.08 (based on 13.8m units and
10.7% op margin, corresponding with our F13 EPS),
roughly in line with where NOK, MOT and RIMM trade

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