Palm Pre Sales Fail to Meet Analyst Expectations

After a much-hyped start, sales of the Palm Pre are beginning to fall short of earlier projections, causing one analyst to backpedal on estimates and downgrade the company in a research note issued Thursday.

Palm Pre sales fell from 200,000 units in June to 100,000 in July, with this month slated to be lower than July, Morgan Joseph Analyst Ilya Grozovsky wrote in a research note shared with

Grozovsky cut his estimate on Palm (NASDAQ: PALM) Pre unit sales for the August quarter to 350,000 from 400,000, which he says is already low relative to Wall Street expectations. He downgraded Palm to “sell” from “hold.”

“We believe that our 400,000 units estimate for Pre was a low estimate relative to Street expectations and, as a result, believe that should the company even achieve these numbers, it would be viewed as a disappointment by investors,” the research note said.

Also, non-Pre product shipments in the quarter were lower than expected due to cannibalization by the Pre, Grozovsky said in the report.

“Should sales prove to be in line with our checks, we believe price cuts may be looming going into the holiday season in an effort to spur holiday sales of the Pre,” he wrote. “This could, in turn, hurt Palm margins as we believe that Palm will have to make price concessions to Sprint. Should margins be negatively impacted, profitability would be pushed out beyond management’s FY 2010 guidance, which we are now increasingly skeptical about.”

Palm is also widely expected to release a mini-version of the Pre, rumored to be called the Pixie, and Grozovsky says it may not debut in time for the holidays.

“We think that the Pixie, which we believe is being geared for AT&T and has a different form factor than the Pre, is not likely to be available for the 2009 holiday season. We do not have significant unit assumptions for this product given the continued success of the iPhone at AT&T, nevertheless, we believe that Palm needs all the unit help it can get to achieve profitability and a delay in incremental units at AT&T with the Pixie would be a setback to this goal,” the note said.

Palm’s fate relies on successful sales of the Pre, which went on sale June 6, as well as the future of an ecosystem built around the company’s new mobile platform webOS.

The smartphone sector is facing unprecedented competition as Apple’s (NASDAQ: AAPL) new iPhone 3GS went on sale weeks after the Pre and Research in Motion (NASDAQ: RIMM) is slated to debut an update to the touchscreen Storm.

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