Palm Valuation Not All It's Cracked Up to Be

With Palm’s shares up more than 900 percent since January, two things are clear: Palm’s Pre and webOS operating system are nothing short of a triumph and the run-up in Palm (PALM) shares is most likely a wee bit overdone.

In a research note issued Monday, Jesup and Lamont analyst Kevin Dede says as much, arguing that the company’s shares are overvalued, particularly in light of Pre returns.

“We stood just as the Street now stands, completely enamored with Palm’s highly innovative new device; however, our checks now lead us to believe that while initial sales could almost be categorized as ‘gangbusters’ and perhaps above initial assumptions, we think there are engineering complications that are driving a higher level of returned devices than otherwise expected.

“From a hardware perspective,” Dede continues, “the Pre includes the features expected in a cutting-edge smartphone, including a large touch screen, one of the most powerful processors designed for a handset, and a slide-out keyboard; we understand that a great many returns are on account of an unsatisfactory experience with the keyboard operation and dead pixels in the screen. Fixing these issues shouldn’t pose a problem, but we think the timing risk and severity should be reflected in the shares.”

Dede notes that his impromptu survey of local retail outlets–Sprint (S), Best Buy (BBY) and Radio Shack–revealed that about one in three devices is being returned. He cites, as well, a survey on Pre Central that suggests roughly 40 percent of initial Pre sales are exchanged.

Now, to be fair, this is anecdotal evidence at best. The Pre Central survey, which at present has only 615 respondents, is hardly statistically relevant. That said, Pre Central is a top Pre fan site, and Palm’s own forum has quite a few complaints, as does SprintUsers. So clearly, something’s going on here.

Reached for comment on the issue, Palm had this to say: “We think the Palm Pre is the best product we’ve ever shipped. While we haven’t seen anything out of the ordinary we will continue to closely monitor both Palm and Sprint customer service channels.”

Despite concerns about the Pre’s build quality and Dede’s contention that the company’s stock is overvalued, the analyst sees good things ahead for Palm. “In light of the overwhelming evidence supporting continued growth of converged devices, we believe Palm addresses the most enchanting segment of the mobile device market and should experience at least market growth over the longer term.

“Shorter term is obviously more interesting, and we believe Palm’s technology positions it to gain share at the expense of those companies offering less attractive, less functional devices,” Dede adds, concluding, “The competitive technology race boils down to ease of use across an increasingly complex technical environment.”

UPDATE: Concerned that its survey has been taken out of context, Pre Central is running another poll on Pre build quality, this one on its blog, rather than its forums. And while it’s no more statistically relevant than the original, it’s worth noting. Because with more than twice the number of respondents, it shows just 18 percent of initial Pre sales being exchanged.