Stock market gives Palm a thumbs-down

Shares of Palm lost one-third of their value Thursday, a day after the company posted earnings that topped published estimates but failed to dazzle.

Yankowski defends Palm's outlook Carl Yankowski, CEO, Palm

The drop came after the handheld computer maker reported earnings a penny above the First Call/Thomson Financial consensus estimate. Revenue was $522.2 million--within the $500 million to $530 million range that Palm had guided analysts to expect.

Palm's stock closed down $12.50, or 33 percent, at $25.63 on a volume of 77.6 million shares--more than six times its average daily volume.

Other handheld makers were also trading lower Thursday. Shares of Palm licensee Handspring closed down $10.19, or 23 percent, at $33.94. Meanwhile, shares of Research In Motion, which also reported better-than-expected earnings Wednesday, were off $9.06, or 12 percent, at $65.94.

Although Palm handhelds appear to be selling well this holiday season, Salomon Smith Barney analyst Richard Gardner warned Thursday that Palm is not immune to a slowing economy.

"While CEO Carl Yankowski stated that the handheld market seemed insulated from the decline in consumer spending during (the fourth quarter), we remain cautious on prospects for the continued insulation exiting the holiday selling season," Gardner wrote in a report. "A bleak macro picture exiting 2000 does not give us confidence that any consumer segment will be able to escape the effects of an economic downturn."

Morgan Stanley Dean Witter analyst Gillian Munson came to Palm's defense, calling the earnings report "solid."

"This may be disappointing to some in this market environment where good news is very bad, and very good news is just okay," Munson wrote in a report. "However, we think (Palm's) results and the company's outlook were positive."

Other brokers were also bullish on Palm. ING Barings, CIBC World Markets and Pacific Crest Securities reiterated their "strong buy" ratings, while Bear Stearns reiterated its "buy" rating.

Palm's shares even got an upgrade from one analyst. Mirva Antilla at Josephthal & Co. upgraded the stock to "buy" from "hold" because of its more "attractive valuation" and gave it a price target of $50. Antilla also raised estimates for fiscal 2001 to 13 cents a share, a penny higher than the previous estimate.

Among the concerns weighing against Palm is its planned transition next year to incorporate a postage stamp-sized expansion port known as Secure Digital (SD). During its conference call Wednesday, Palm executives said a Palm Vx-like device with SD should appear in May and a wireless Palm VII-like handheld with the port will come in the second half of the year.

"Major product transitions are difficult for any company to manage--many customers delay purchases of current models ahead of the new model introductions, and companies may have to discount prices of older product in the channel to increase sell-through," Gardner wrote.

During the conference call, Palm also reiterated its intent to be more than just a device maker, even though sales of Palm handhelds and accessories continued to account for 97 percent of sales--the same percentage as last quarter. The company brought in $6.7 million, or 1.3 percent of revenue, from licensing its operating system and $8.8 million, or 1.7 percent of sales, from its content and wireless access business.

News.com's Rachel Konrad and staff writer Tiffany Kary contributed to this report.