Palm investors celebrating too soon?

LAS VEGAS Fri Jan 9, 2009 6:44pm EST

1 of 3. The Palm Pre smartphone is demonstrated (R) next to its screen display at the annual Consumer Electronics Show (CES) in Las Vegas, Nevada January 8, 2009.

Credit: Reuters/Rick Wilking

LAS VEGAS (Reuters) - Palm Inc PALM.O stole the limelight at the Consumer Electronics Show by unveiling a new touch-screen phone and mobile operating system that doubled its share price overnight.

But investors may be celebrating too soon.

Analysts gave a thumbs-up to the new Palm Pre smartphone and webOS operating system, but said it was too early to conclude that the long-awaited new products can rescue Palm, which has lost both market share and cachet to Apple Inc's (AAPL.O) iPhone and Research In Motion's RIM.TO BlackBerry.

They said important questions remain unanswered, including price, how quickly Palm can bring the device to market, and how long the phone would be exclusive to subscribers of Sprint Nextel Corp (S.N), the weakest of the top three U.S. mobile services.

"Palm remains a 'show-me' story in our view, with its turnaround dependent upon execution and financial performance beyond webOS and Pre's initial debut," said Mike Abramsky, RBC analyst who reiterated his "sector perform."

At 4.8 ounces, the Pre is light in the hand and smooth to the touch, with a slight curvature to its frame once its slide-out keyboard is deployed. Its black plastic case has only one button, like the iPhone, beneath a big, 3.1-inch touch screen.

The Pre's sleek back has a lens for its 3-megapixel camera, and a hidden tab on the side reveals a USB slot for music, charging and other data. Users can access a full keyboard by gently sliding up the phone's face.

The phone's unveiling drew cheers from a packed auditorium in Las Vegas [ID:nN08111363], but the device was not on the CES exhibit floor as Palm is still putting finishing touches on the phone.

Palm Chief Executive Ed Colligan and Jon Rubenstein, a former Apple executive who helped create the iPod, described how users will be able to keep multiple applications open, such as email, maps, photos, and move between them. Pre perceives applications as "activity cards" that users can flip through on the touch screen, Palm said.

Rubenstein was brought to Palm by private equity firm Elevation Partners, which bought a 25 percent stake in the company for $325 million in June 2007. The phone was developed under his watch, and analysts said it looked strong enough to challenge the iPhone, BlackBerry and handsets using Google Inc's (GOOG.O) Android operating system.

PAST FAILURES

Shares of Palm jumped to as high as $6.58 on Friday, from $3.30 before the announcement on Thursday. RBC's Abramsky had raised his price target to $3.50 from $2.00 after the news.

CL King analyst Lawrence Harris said Palm's share vault was due to short covering, as well as excitement over what he called an "intriguing device." But he also had questions about Pre.

"Apple is not going to be staying in one place. Neither will Google. Neither will Research In Motion," he said, adding that it was unknown how well Pre would compete with a new iPhone he expects Apple to bring out around mid-year.

Harris said Pre's high quality suggested it could command a high price, but Palm would need to stick as close as it can to the iPhone's $200 price tag, which set a benchmark for U.S. smartphones when it came out last July.

Analysts also wondered if Palm would deliver the Pre efficiently, after a history of missteps that have haunted the company in recent years, including delayed delivery of its Treo 750 phone for AT&T (T.N) and Treo 755e for Verizon Wireless.

The Pre comes about a year and a half after Palm famously pulled the plug on its last big technology idea, the Foleo.

A public relations nightmare, the Foleo was a much-hyped portable computer that was harshly criticized when it was unveiled in May 2007 and abruptly canceled in September, just weeks before it was to expected to ship.

Palm sought to assuage these concerns, saying on Thursday that the Pre was the beginning of a long future of sophisticated smartphones based on webOS.

"Palm webOS is something we can innovate around for a long time to come. The platform is going to support a whole line of products and there are other products in the pipeline," said Brodie Keast, Palm's senior vice president of marketing.

Palm has long supported touch screens, multimedia, and access to online services, but the operating system in its current Centro phones is seen as antiquated.

Analysts said the new software could make Palm a more attractive takeover target for other companies in the phone industry that might not want to develop their own technology.

GOING GLOBAL?

Palm said the Pre will be available on Sprint's network in the first half of 2009. Analysts said they were anxious to know if an overseas version would follow, and wondered about the duration of Palm's U.S. exclusivity agreement with Sprint, which has been engaged in a long struggle to stem customer losses.

"Larger carriers -- those who have displayed an ability to grow subscribers -- would be more advantageous," said CL King's Harris, naming AT&T and Verizon Wireless, owned by Verizon Communications (VZ.N) and Vodafone Group Plc (VOD.L).

Harris said Palm should diversify beyond Sprint, which by his estimates generated 41 percent of its sales in fiscal 2008.

(Additional reporting by Ritsuko Ando in New York, editing by Tiffany Wu and Matthew Lewis)

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