Yes Palm Inc. (NASDAQ: PALM) makes a slick mobile operating system. WebOS, released in 2009 , has breathed new life into the struggling smartphone maker. They also make decent hardware, in the form of the somewhat successful Palm Pre and newer baby Palm Pixi.

But, as we sometimes hate to admit here in Silicon Valley, technology alone is not a viable business model.

While, Palm has seen phenomenal stock performance this year (+400%) , and cash seems healthy (about $590M), when you dig deeper things look grim.

And as I’ve said before, as much as I love Sunnyvale-based Palm they don’t have deep enough pockets to play the mobile game with the likes of Apple, Microsoft, Rim and Google. That’s unfortunate. Their innovation is great for the industry and consumers, but unfortunately, I fear, it will not be great for investors.

Looking at stock price and cash along don’t tell the whole story, and, in fact, distort underlying strategic issues.

The pop in the stock price is no doubt sweet. However, keeping it in perspective, this is a company that was dead-for a second time. And so, any new product, or inkling of life was rewarded. In this case, as mentioned, WebOS and the Palm Pre led the way, if only briefly.

Cash reserves include an equity offer from September of about $360M. The quarterly loss of $86M represents about 33% of case pre-equity event, or 14% post. In either case, bad. Alarms should be going off… how much longer can Palm stay in business? They are spread thin. Building hardware, and software, while competing with gorillas in a low margin smartphone game where the real profits are in services (cell service contracts for Verizon, T-Mobile, AT&T, Sprint), content revenue for Apple with iTunes, and Ad revenue for Google, for example).

Another warning sign: management’s plan to adopt a new accounting standard that will enable it to recognize revenue from new product sales upon delivery, instead of the current 24-month amortization. This is like asking for your allowance for the next two years up-front.

What’s Palm to do?

One idea: spin-off hardware (to HTC?). Focus solely on software. License the OS to other smartphone makers.

That may not be ideal, but the management team had better be whiteboarding some strategic alternatives, now. In other words, it’s business as usual at Palm.

Clinton Stark

Clint writes about new media, arts, wine, indie film, and tech (including his trusty Droid). An aging ice hockey player, he tries in vain to direct Loni in SSC videos. He's held executive marketing roles at tech companies including Cisco, EMC and Salesforce.com. Originally from Ottawa, Canada, he now lives in Silicon Valley. More »

Connect: Twitter | Facebook

SSC - ALL THINGS WEST COAST
Social: Facebook | Twitter
Mobile: SSC iPhone app
Press/requests/events: press@starksilvercreek.com