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THE DAY AHEAD: Tug of war over Palm prospects

COMMENTARY--Palm CEO Carl Yankowski said his company's fourth-quarter outlook and sales slowdown is "jarring to us." Just wait until he sees how jarring it is to investors.

Analysts were expecting Palm's outlook for the fourth quarter to be cautious, but they remained confident about Palm's prospects in the quarter and fiscal 2002. A cautious outlook was expected, but investors got something far worse--Palm sales will be more than $250 million lower than estimates. Shares predictably plunged in afterhours trading.

How investors react today will go a long way to showing how much they believe in the wireless access market and Palm's (Nasdaq: PALM) prospects. Look for a tug of war on the topic. An early survey of analysts, indicates that Wall Street is split. Some firms retained "buy" ratings on the "long-term secular growth trend in the handheld computer market." Other brokerages--Robertson Stephens and Goldman Sachs--downgraded Palm.

Citing a "deteriorating macroeconomic environment" and product transition, Palm said it will report fourth-quarter sales of $300 million to $315 million. Wall Street was expecting sales of $572.6 million. Palm also said it will report a loss of 8 cents a share, well below projections calling for a profit of 3 cents a share.

During these tough times, Palm's balance sheet will also struggle. Palm's cash position was reduced from $743 million to $596 million in the fourth quarter.

The outlook is shocking. Palm, which is dominant in the personal digital assistant market, was entering the corporate market and had the gizmo that people couldn't do without. Its Palm operating system was being licensed all over the place.

And then Palm delivered its outlook. Sure, Palm is going through a product transition, and many folks will hold out for Palm's new m500 series handhelds. But the key takeaway is that sales for the fourth quarter will be flat compared to a year ago. Palm reported revenue of $350 million in the fourth quarter of 2000, but that was because the company couldn't meet demand.

As for the fiscal 2002 outlook, CFO Judy Bruner said it wouldn't be prudent to offer one.

Simply put, Palm's outlook--or lack of one--stinks.

Nevertheless, a few analysts will stick with Palm. In a research note this morning, Bear Stearns analyst Andy Neff likened the handheld market to the growing pains of the PC industry in the early days. "Like the PC industry before it, which experienced similar growing pains during its expansion, we believe that the handheld market will be able to outgrow the current difficulties," said Neff, who noted Palm is the leader in handheld software and hardware.

A little channel stuffing with that Palm?
And like those PC makers, Palm can sometimes stuff the sales channel. Palm was clearly pushing more goods to retailers than they could use.

Lehman Brothers analyst Joseph To said in a research report that February accounted for more than 60 percent of Palm's quarter, indicating the company was sprinting to meet estimates. To estimated that Palm's inventory stands at 12 weeks. Palm warned that inventory will balloon in the fourth quarter.

Retailers are also refusing to take more Palm inventory, according to To. "In our discussions with Handspring, it appears that common retailers that the two companies share are not taking any additional product from Palm because they are already at high levels of inventory," he said.

Indeed, Handspring (Nasdaq: HAND), Palm's main rival, isn't seeing problems. It reiterated its fiscal 2001 outlook after Palm blew up. Analysts are expecting a 2001 loss of 26 cents a share on sales of $433.5 million, according to First Call.

CS First Boston analyst Marc Cabi said Handspring has a smaller revenue base, strong demand, rising average selling prices and a new reseller deal with Ingram Micro to insulate it from Palm's problems.

So long Suria
Amazon's worst critic is going away. It's safe to say Amazon CEO Jeff Bezos won't miss Ravi Suria, but we will.

Suria, Lehman Brothers bond analyst, is leaving the firm to go to Duquesne Capital Management, a hedge fund firm. Hedge fund manager Stanley Druckenmiller apparently gave Suria an offer he couldn't refuse.

If you recall, Suria is the analyst that has been repeatedly warning about Amazon's (Nasdaq: AMZN) business prospects. Suria also flagged a meltdown in the telecommunications sector months before things unraveled.

So why is Suria's departure a big deal? He was one of the few analysts on Wall Street that dished out research that was impressive. Suria looked at a company's financials and credit prospects and often snubbed his nose at the "story" behind a stock.

Suria also signaled the bearish dot-com analyst trend. After Suria's first bearish report on Amazon, Holly Becker, Lehman's equity analyst, made a name for herself by flagging dot-com problems. Other equity analysts followed.

Suria may not be proven right about his conclusions about Amazon, but you can't fault his in-depth research. That's why Suria had a strong following on Wall Street--he didn't dish out BS.

Did Suria leave under pressure? No one is going to say, but Suria's opinions certainly made life rough in the investment banking department. That said, Lehman has one of the most independent research departments on Wall Street. Like many analysts, Suria probably got tired of the game on the sell side. TDAIN
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