Palm Looks for Smartphone Silver Bullet

Palm is betting big on its Pre phone, but there are plenty of hurdles in the smartphone's path.
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Palm

(PALM)

shares climbed steadily on Friday as investors shrugged off the company's widening

third-quarter losses

and looked ahead to the launch of the firm's eagerly awaited Pre phone.

The smartphone maker, which is struggling to compete with

Apple's

(AAPL) - Get Report

iPhone and

Research In Motion'a

(RIMM)

Blackberry, expects the Pre to breathe new life into its flagging sales. Clearly, this message is resonating with investors.

Even Palm's miserable

third-quarter results

, which were released late Thursday, failed to dampen enthusiasm for the company's stock.

Palm's shares were rising 31 cents, or 4%, to $8.02, outpacing the broader decline in tech stocks that saw the

Nasdaq

slip 0.6%.

Clearly, Palm is betting big on the Pre and its

WebOS

operating system, although at least one analyst warns that investors should not see the smartphone as some sort of silver bullet.

Although he describes the Pre and WebOS as competitive offerings, Avian Securities analyst Matthew Thornton warns that Apple, RIM and

Google

(GOOG) - Get Report

are all ramping up their efforts around smartphone hardware and software.

"All eyes are on the Pre, but a few months from now, people will be saying that there's a next-generation Storm, Android and iPhone coming," he told

TheStreet.com

. "People have to be cognizant of that." He maintained his neutral rating for the company.

Despite its partnership with

Sprint

(S) - Get Report

to sell the Pre in the U.S., Palm faces an "uphill battle" to clinch carrier deals elsewhere, according to Thronton.

"They don't have the brand recognition overseas that they have here," he said, adding that Palm also faces the challenge of luring developers onto its platform.

Palm has not yet revealed which European partners it will work with, although the company's CEO, Ed Colligan, sought to reassure investors during Thursday's conference call.

"You can be assured that we have excellent options available to us," he said, explaining that the company met with some of Europe's largest carriers during the recent Mobile World Congress event in Barcelona, Spain.

Palm, however, will find itself jostling for a position in a crowded market. The Sunnyvale, Calif.-based firm already has a deal to sell its Treo phones with U.K. telecom giant

Vodafone

(VOD) - Get Report

, which also touts

HTC's

Android-based smartphones

.

Any delays to the Pre's rollout could also prove catastrophic for Palm, but the firm says that it is still on track to launch the product by the middle of this year.

"Our development efforts are in high gear as we polish the user interface and finish up key applications, complete carrier certification and field testing, and prepare to ramp manufacturing," said Colligan.

Rather than dwell on the challenges facing the phone maker, the CEO focused on the Pre's ability to rejuvenate Palm's business.

"There are expected to be about 180 million new customers who buy smartphones over the next few years," he added. "So I think there's a lot of room for us to have a big opportunity here."

This message is certainly getting through to investors. After hitting a bottom in December, Palm's shares have risen more than 600% as the firm

restructured its business

to fund the launch of the Pre and WebOS.

Palm's miserable third-quarter performance, however, was not completely out of the blue, and the firm recently

warned

that sales could come in below Wall Street's expectations due to customers delaying purchases.

The firm saw its revenue fall to $90.6 million, down from $312 million in the same period last year and well below analysts' estimate of $104.95 million. Smartphones brought in just $77.5 million during the third quarter, down 72% from the same period last year.