Palm plunges, but analysts upbeat

Palm (Nasdaq: PALM) plunged 31 percent Thursday despite a strong quarterly report and unanimous kudos from analysts.

Shares were down 11.5 to 26.63 following the company's Wednesday report that showed earnings were above consensus and revenues were up 100 percent year-over-year for the fourth consecutive quarter.

Analysts said that though revenue wasn't impressive relative to expectations, the company's strong unit growth, and the easing off of component shortages indicate good times ahead.

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

Antilla praised several growth metrics for the company, including its aggressive international expansion, which brought the percentage of sales from outside the U.S. up to 38 from 31 a quarter ago.

The analyst noted that the component shortages which have hampered sales are expected to be alleviated in February and March.

The only real negative in the quarter was a decline in gross margins, which were 36.1 percent as opposed to 38.3 percent. This decline was a result of a larger share of Palm's revenues coming from lower-priced handheld devices, the analyst said, adding that this is also expected to change in the third quarter.

C.E. Unterberg, Towbin analyst Jason Tsai reiterated a "buy" rating and $53 price target. He anticipated a negative reaction to the results, and said that this is a good buying opportunity for long-term investors

Tsai said that though revenue was slightly below his estimates, the company bested unit estimates and earnings were in line with expectations. Tsai lowered earnings estimates for fiscal 2001 to 13 cents a share, from 14 cents a share, and predicted that decreased unit pricing, margins, and operating expenses will offset incremental unit sales going forward.

Though the company's revenue performance was "clearly disappointing on a first- look basis... we believe the more important point underlying the results... was its unit shipments of 2.16 million units. We believe that this good performance on unit volume will ultimately build a stronger Palm Economy - validating our thesis that this is a wireless data communications platform."

Lehman Brothers analyst Joseph To maintained a "buy" rating and raised estimates slightly.

"Given the tight component environment and some of the macroeconomic issues that have been affecting big ticket purchases, such as PCs but not PDA purchases, we are impressed by this revenue number," To stated in a research note.

To said checks at retail stores over the past several weeks and anecdotal stories from Palm CEO Carl Yankowski have led him to believe "that there has been strong demand for both Palm Products as well as Handspring Visors this Christmas."

Bear Stearns analyst Andrew J. Neff also maintained a "buy" rating and praised the company's performance, "despite component constraints."

He said sales that were just in line with the Street range of $515-$530 million, and below some analysts' expectations may account for the weakness in the stock after the report, and added that "this weakness (is) an opportunity given that -- looking ahead -- we see new products, new services, wireless email, expanding margins, and improvement in component availability."

Neff urged analysts to look at the big picture: significant growth in the handheld market -- expected to show 8 million handhelds shipped this year compared to 135 million PCs and 415 million cell phones -- and Palm's solid model for expansion and new applications.

He said Palm has many of the attributes of the PC industry in its early days with a twist -- "PALM is both a device company (think Dell or Compaq in early days) and an operating system company (think Microsoft with its margins and growth)."

"In this turbulent market, it is difficult to defend a price target based on comparables, but we believe that there is a compelling risk/reward ratio in owning the stock at this level," Neff added.

Morgan Stanley analyst Gillian Munson was even more bullish on the stock, reiterating a "strong buy."

"We believe there is a secular shift toward mobile computing that benefits Palm and makes it a must own stock. Market volatility will be an issue near term but we maintain our $70 price target," Munson said.