The earnings season has kicked into full swing as most of the big players are reporting their earnings. Nokia (NYSE:NOK) is also going to announce its first-quarter earnings on April 18 - previous quarter was the first positive quarter for the company when it broke its streak of consecutive quarters with losses. However, first quarter earnings will prove to be even more important as these results might set the tone for the future of the company. Looking at the market capitalization of the company, it is clear that investors are valuing the company at lower than its true value. However, this lower valuation comes from the skepticism and fierce competition in the smartphones market.
First quarter earnings will be mainly made up of high-end Lumia sales as low-end handsets were launched later in the quarter. As a result, we are not likely to see a big impact by low-end Lumia sales - second quarter will be when we will be able to see how low-end handsets are contributing towards the total revenue. In my opinion, Nokia would have benefited if the low-end handsets were launched earlier as these devices have been selling at an impressive rate in their respective markets. For the first quarter, the analysts are expecting the company to report sales of 5.6 million Lumia devices at an average selling price of €190 ($249).
Furthermore, analysts are also expecting a decline in net cash from €4.36 billion ($5.71 billion) to €3.7 billion ($4.85 billion). Launch of new Lumia handsets have resulted in substantial cash expenditures; especially, a considerable amount has been spent on promotions and advertisements. Consensus estimate for revenue is $8.65 billion for the quarter, down 11.7% year-over-year from $9.79 billion. For the first quarter, loss per share is expected to be $0.06 per share, down from $0.11 per share from the same quarter last year. Most of the analysts are expecting the company to report earnings close to the lower end of the guidance for the quarter. First quarter sales might be lower than the last quarter due to the seasonality and higher sales of WP7 devices at low prices in the previous quarter.
Short Interest, Activity in Options and Impact on the Stock Price
Short interest for Nokia is at about 299 million shares, which is about 8% of the total float of the company. Short interest have declined by almost 28 million shares recently; however, it will still take about 7 days for the short sellers to cover their positions taking into account the daily average volume of the stock. At the moment, the sentiment of the market is bearish towards the company. Over the past week, a large number of June put contracts have been bought, which indicates that investors have a bearish mindset for the short-term, and they expect the company to disappoint in the upcoming earnings announcement.
On the other hand, a substantial number of call options have also been bought in the past two weeks - longer term call options have outnumbered short-term put options by 2 to 1. This is an interesting scenario; it can mean that investors and speculators are bullish in the long-term about Nokia, or it can simply mean that short sellers are making arrangements to cover their short positions in the future, in case Nokia share price goes up. A better than expected earnings announcement and future guideline can result in a short squeeze. Similarly, a disappointing earnings report will can give the bears an opportunity to have a profitable day in the market.
A decision about trading Nokia depends on your long-term view of the company. If you are a long-term investor and believe that Nokia will be able to reach its past heights, then short-term price fluctuations should not bother you. I personally believe that the company is on the right path and the long-term future is bright for Nokia. However, if you have a bearish view of the company, then there might be some profitable opportunity in the short-term with considerable risk.
I have mentioned in my previous articles that I am confident that the company will be able to complete its turn-around. There might be small hitches along the way, but the long-term prospects are bright. Second-quarter will be the real barometer of the performance of the company as we will have sales from the low-end devices as well as from new expected launches. Long-term investors of the company should not be alarmed if the company reports less than impressive results, because if there is a decline in sales, then it is mainly due to seasonality and late launch of low price handsets. With these new rumored phones on the horizon, Nokia should start to recapture its market share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.