Is Palm approaching its last stand?

Palm is reportedly looking for buyers, but folks aren't buying it. Just the fact that Palm is looking for a buyer may indicate the company is in trouble.

The Wall Street Journal is reporting (subscription required) that Palm has hired Morgan Stanley to evaluate options including a sale or move to go private. Typically that's good news. Today, however, Wall Street types are viewing Palm's options as limited.

J.P. Morgan analyst Paul Coster downgraded Palm and didn't exactly mince words:

"We believe Palm's product line-up is stale, price-based competition will likely weigh on ASPs and gross margins, and R&D could climb in fiscal year 2008 as Palm races to develop a new Treo platform."

Coster's argument--that Palm is getting whacked by price competition--isn't new. The projection that Palm will have to invest heavily to create a "multi-threaded Palm OS, a proprietary communications protocol stack, and a flexible platform for next generation products" indicates that the company will have to find a partner or be under even more pressure.

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The overarching question for Palm is over whether it can compete in the market for next generation mobile devices. So far, Palm's future rests on the Treo, which accounts for 60 percent of the company's revenue. Palm goes as the Treo goes and if the product loses share the company is in big trouble.

Coster said:

"Palm appears to be aiming for a new product cycle in 2008, but we are skeptical that the company can capture 07 holiday sales owing to a lengthening engineering cycle. Moreover, Palm's core-competences seem too narrow for the next generation of differentiated mobile solutions, where emphasis will be on server-side applications and services that complement the device."

That last point about the mobile war being fought on the server-side is notable.

Nollenberger analyst Casey Ryan also downgraded Palm shares, but held out some hope that the company could boost international sales and rebound. Overall, though Ryan is optimistic about Palm, but notes that the "Palm buyout theory remains unproven."   

For folks that love their Treos--and there are a lot of you--this Palm skepticism may be a bit disheartening. While Palm may not be in the dead pool there are significant questions about its future. Perhaps a move to go private would enable the company to push the innovation envelope. Today, it can't invest too heavily without hearing heckling over profit margins.

In other words, Palm has to get bigger. But it's unclear whether a big player like Nokia would be interested. Motorola wouldn't be a bad fit, but there are no slam dunks. Coster lays out the landscape:

"We believe there is value in the Palm brand and channel, but neither fits well - strategically - with a tier 1 handset OEM's.  Palm lacks significant IP, outside of the client-side Palm Operating System, but we believe this is an increasingly unimportant basis for handset differentiation."

More mileposts in the Palm saga will come later this month. Palm reports earnings March 22 with an analyst day on April 10.