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Palm's a Fit for Hewlett-Packard

Stocks in this article: PALM

A Palm (PALM) reading tells two fortunes: It's either a dire broken life line, or it's swept off its feet to a happy ever-after by a suitor like Hewlett-Packard (HPQ).

The smartphone pioneer was up 3% Wednesday despite Tuesday's announcement of a jaw-dropping $70 million revenue shortfall in its fiscal third quarter -- 44% below the sales target.

Palm pointed to drooping demand for its old Treos and a critical delay in getting its new Treo Pro to the market. Treo Pro is now scheduled for arrival at Sprint (S) in mid-March.

The dismal performance is a throwback to the Palm of 2008, left for dead as Research In Motion (RIMM) and Apple (AAPL) charged ahead in the smartphone market. But lately investors have taken a sunnier view of the Sunnyvale, Calif., tech shop, thanks to the upcoming Palm Pre, a touchscreen phone with a slide out keyboard running on a promising new operating system.

Palm shares are up 140% this year amid one of the worst stock market declines in decades.

Why the strong sentiment? Early reviews of Palm's Pre suggest there's new life in the old smartphone shop. Others are jazzed about the prospects that Palm's revitalized Pre effort would fit well in a larger tech outfit struggling to find growth.

"One of the only growth categories in the entire tech food chain is smartphones," says Collins Stewart analyst Ashok Kumar. Acquiring Palm would be a logical move for companies looking for an entry, he says.

"The crown jewel is Palm's Web OS," says Kumar, referring to the new operating system on the Palm Pre. For companies like Hewlett-Packard, Palm would be a "bite-sized and accretive" move allowing them to "increase their footprint in consumer devices," says Kumar.

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