Reasons Why PALM May Be A Buy Here

Just about everyone had written off PALM; many investors, I think, are reconsidering the stock. The Palm Pre is a great product - it just needs more apps. It may not be a better piece of hardware overall than iPhone or Blackberry, but it doesn't need to be. It just needs to be competitive and gain a market-share niche.

Product reviews have been excellent. It effectively combines AAPL's touchscreen technology with a RIMM-type keypad. And Pre is competitive, in terms of features, with iPhone and Blackberry products (quality of camera, battery life, etc.).

Sprint’s All-Everything Plan offers, by far, the best overall value in the market for 3G phone plans. This will sustain Pre sales going forward. So, a good phone plus a cheap plan will most likely beget big sales. The Pre completely sold out on the weekend of June 6-7; the majority of outlets had completely run out of the product by 12:00 p.m. on Saturday. About 80,000 units were sold, and most analysts believe the company probably would have sold 150,000 if they hadn't run out.

PALM has als just hired a new, widely respected CEO. Plus it will likely make a VZ launch in 6 months, which would greatly expand its potential market.

Shifting gears a bit, the company is attractive as a strategic acquisition candidate. The short interest is at over 29% of the float. There's clear potential for monster short squeeze. Also, the top-10 holders of the stock control 77% of the shares outstanding. I perused the list and these are strong hands. Thus, the effective float for this stock is tiny. This magnifies the potential for a massive short squeeze.

Virtually nobody has believed in these guys; almost everybody had written them off. Perhaps, until now. There's little doubt that analysts are going to have to go back to the drawing board on this one. Huge EPS and price-target revisions could help drive the stock.

One thing to factor in is that PALM has been losing money for many years, and its cash position is weak. In order to ramp production, shipments, and marketing, PALM is likely to do a modestly dilutive secondary share offering in the near future. However, institutions are going to want in on this one, so raising capital at this juncture should be no problem.

Based on a quick estimation -- a conservative estimate of the market share they could eventually gain, and the amount of shares they're likely to issue -- this stock should probably be worth $45-$55. The stock could reach $25 by July, and perhaps $35 by the end of 2009, depending on market conditions. A massive short squeeze could send this stock even higher.

Plus, a strategic acquisition is a distinct possibility. Traditional handset players, such as Nokia, Sony-Ericsson, Samsung, LG, or Motorola are probably highly interested, as they're currently behind the curve in terms of 3G. Indeed, it could be reasonably argued that several of these companies need to make this acquisition because 2G technology is becoming obsolete; they may get shut out of the market if they cannot establish a serious presence in the 3G market within the next 12 months. It's unlikely that many of these companies are going to be able to do this without a strategic acquisition, and Palm is the only truly viable choice. If these companies don't move quickly, they literally risk dying on the vine.

In addition, it's kind of mind-boggling the strategic possibilities that PALM could offer DELL, MSFT or even CSCO - companies that might want to stake a claim in this incredibly important space.

I just don't think PALM could be acquired for less than $45, which implies a valuation of around $6 billion. Indeed, the strategic implications for all of the aforementioned potential acquirers are huge, and it's quite possible that a bidding war could erupt. If that happens, it could boost the value of the stock considerably further.

Position: Looking to build a position in PALM very soon