Nokia's really ugly third quarter numbers--and how I'd play the swing in this stock over the next three months or so

10/19/2012 11:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The numbers Nokia (NOK) reported yesterday morning, October 18, for its third quarter were so ugly that the big question is why the stock was down just 4.76% at the close in New York.

Of course, expectations were really, really low. Nokia reported a loss of 0.07 euros a share and that was still a positive surprise since analysts were looking for a loss of 0.10 euros per share. Revenue fell 19.4% year to year but revenue was still 3.9% above the Wall Street consensus.

But below the headline numbers, things went south rapidly. Nokia shipped 82.9 million phones in the quarter—that was down 1% from the previous quarter and down 22% for the third quarter of 2011. Smartphone unit sales fell by 38% from the previous quarter and 63% from the third quarter of 2011. Unit sales of Lumia models, key to Nokia’s attempt to regain some market share, fell to 2.9 million units from 4 million in the second quarter of 2012.

The truth is, though, that nothing this quarter matters much—except cash levels. Cash levels fell by 633 million euros in the quarter to 3.6 billion euros. That looks like it will be enough to get the company to 2014.

Which brings me to what does matter: Lumia sales in the fourth quarter when the first models of Nokia’s smartphones running the new Windows Phone 8 operating system go on sale. Nokia had expected that Lumia sales would drop in the third quarter as potential customers waited for the new models. The new Lumia 920 and 820 models are scheduled to hit store shelves in the next few weeks in the United States and Europe. How well will they sell? CEO Stephen Elop has essentially bet the company on the answer.

And investors don’t have much information for judging the likely answer to that question. The phones have been positively reviewed with praise for their look and feel, interface, camera, display, and proprietary Nokia apps. But investors don’t know if those qualities will be enough to make anyone buy the phone, and we won’t have even an inkling of a clue of a suspicion until the phones go on sale at AT&T on November 2 or 4. (The preorder date is either October 21 or October 29.) And we don’t know if Nokia will be able to supply enough phones to meet demand—should there be any, of course.

Right now treat this as a very speculative stock that’s best suited for trading. I think the shares could still get to my $7.80 target price (Nokia is a member of my Jubak’s Picks portfolio http://jubakpicks.com/ ) if everything works out reasonably well, but there are just so many “ifs” in this situation right now that I suggest trading this stock on the ebbs and flows of hope and despair until we have a clearer picture of how those questions get answered. Certainly I wouldn’t treat this as a buy-and-hold investment.

You’re looking at the kind of uncertainties in the fourth quarter that can make traders happy but that drive investors nuts. In the short-term I think Nokia is best played as a swing trade with a current top of about $3.40. That’s roughly 20% above today’s price. And we certainly could get that high if early sales in the fourth quarter look promising.

But I do expect that the overall sales numbers for the Lumia will disappoint enough investors when they’re reported for the quarter to drive the stock back down in January to $2.30 to $2.50 or so. After all Nokia is coming late to the fourth quarter market with just two Lumia models.  Anyone expecting a complete turn in the company’s market share in the fourth quarter will be disappointed.

In January I think you’d rather be thinking about buying at those disappointment prices than worrying about selling shares that you have stubbornly held onto. The next upwards swing will take place later in 2013 when Nokia announces more Lumia models to compete at lower price points in the smartphone market. At that point I’d suggest re-evaluating the stock to see if a market share recovery looks more or less likely before the money runs out.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Nokia as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Related Articles on STOCKS