Nokia: Should You Give Up?

| About: Nokia Corporation (NOK)

Nokia (NYSE:NOK) reported disappointing earnings for the first quarter of 2013. It posted revenue of just $7.67 billion against the consensus estimate of $8.45 billion. The Devices and Services segment revenue fell by 32% year over year. The major reason behind this downfall was - the sales decline in feature phones (volume fell 21% year over year) due to tough competition in $100-$150 segment, where Nokia competes with its rivals' entry-level smartphones.

Nokia sold 55.8 million feature phones in this quarter, down from 70.8 million a year ago. Sales of its feature phone Asha has gone down, from 9.3 million last quarter to only 5 million this quarter which should be a matter of concern for Nokia investors. However, an updated Asha and new Nokia 105 and 301 should give the required boost to the sales in the second quarter.

On the other side, its gross margin rose from 14% in the fourth quarter to over 16% in the first quarter. Although these figures are not that good in comparison to Apple (AAPL) or Samsung (OTC:SSNLF), but it looks great if we consider the fact that Nokia solely focuses on Windows Phone devices. Another positive side of the results was Nokia Siemens Network (NSN), which continued to impress with flat turnover and an operating profit of 7%. It reported $351 million in positive operating cash flow, and an increase in net cash of $278.2 million. As a result, Nokia's net cash is now $5.85 billion or $1.57 per share.

Lumia is the future of Nokia

One of the positive aspects of Nokia's earnings was the stellar performance of its Lumia series (505, 520 and 920). It sold 5.6 million handsets (27% more) in comparison to 4.4 million in fourth quarter and hence, was successful in covering the losses incurred by the Asha series. The company expects to sell around 7 million Lumia units in the second quarter. Apparently, this seems to be an impressive forecast in a market that is 90% controlled by Apple and Samsung. However, I think these figures are quite achievable, considering the fact that it was able to post impressive sales figures in the first quarter which is normally difficult for handset manufacturers due to the slow demand after the holiday season.

What are Apple & Samsung up to?

In the first quarter, Apple sold 47.8 million (up by 23%) iPhones in comparison to 37 million iPhones in first quarter of 2012. Moreover, the company generated over $23 billion in cash flow which makes it strong in terms of cash balance. Another plus point for its investors is that it delivered a dividend of $2.65 per share. In June, Apple may release a low-cost iPhone and iPhone5 in order to compete with Nokia's low-cost smartphones. This will further enhance its dominance in the global smartphone market.

Moving on to another rival, Samsung has already sold over 68 million smartphones in the first quarter, which is more than 63 million in the fourth quarter of 2012, due to the robust sales of Galaxy SIII and Galaxy Note II. Despite the post-holiday shopping slump, Samsung is expecting operating profit of 8.7 trillion won (US$7.7 billion), in first quarter of 2013, up 53 % from the operating profit of 5.7 trillion won (US$ 5.09 billion), it earned a year earlier.

The investing opportunity

I think Nokia is a good stock to include in your portfolio. Though, investors may see some momentary fluctuations in the stock price in the near term, seeing the accelerating demand in smartphones, Nokia is a must buy for long term.

Also, investors shouldn't forget the fourth quarter dramatic improvement with the handset business which returned positive cash flow. Continuing the trend, in this quarter Nokia was able to breakeven the cash flow, if we exclude the $167.7 million of cash restructuring costs incurred.

The growth in Lumia's sales and positive cash flow because of NSN shows that Nokia could see a lot of upside potential. The company has staked its future on its next generation of Windows smartphones. Though Nokia recorded losses amounting to $440.7 million, it is a significant improvement from the $2.04 billion loss reported during the first quarter of 2012.

These improvements bode well for Nokia and reassures that funds are still available for Nokia to invest further in its lucrative line of Lumia series and Windows OS. Seeing the day by day decline in feature phones, Nokia has significant growth potential for its Lumia range.

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.