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Judging by the market reaction, you'd think that Nokia (NYSE: NOK ) just reported a totally brilliant quarter. But that's a mirage. The Finnish phone maker's results were mediocre at best, but that's good enough for a big jump when investors expected far worse.
Before breaking out the champagne, consider the fact that this rocket-boosted jump only brought Nokia shares back to where they were a week ago. To put the freshly erased swoon into further perspective, remember that the Dow Jones (INDEX: ^DJI ) steadily gained 2% over the same span.
Nokia's sales fell 19% year over year to hit the average analyst's view right on the nose. The year-ago period's adjusted earnings of $0.08 per depositary share turned into a $0.07 loss per share -- which is slightly better than the Street's expectations.
The all-in gamble on smartphones based on Microsoft's (Nasdaq: MSFT ) Windows Phone software is starting to pay off, as the Windows-based Lumia product line doubled to 4 million units compared to the previous quarter. That jump is still a far cry from replacing all the old Symbian phones Nokia used to sell, but what if the company can keep doubling sales every quarter? You know what they say about grains of rice on a chessboard, right? It'll only take two years to reach a billion units per quarter!
But that's ridiculous, of course. These drastic growth rates are temporary and very typical of brand-new products. In this particular case, near-term growth might actually accelerate as Mr. Softy introduces the Windows Phone 8 platform. This is Microsoft's white knight, akin to BlackBerry 10 from Research In Motion (Nasdaq: RIMM ) . Redmond and Nokia hope that this update is met with cheering crowds at every store, instantly establishing a credible alternative to the Apple (Nasdaq: AAPL ) and Android smartphone duopoly.
But that's far from a safe bet. I worry that both RIM and NokiSoft might reprise the sad story of Palm instead. The WebOS software was hailed as the second coming of user-friendly interfaces, but great reviews didn't convert into strong sales. Palm is now a defunct division of Hewlett-Packard, abandoned even by its would-be savior.
Nokia set the bar very low for the third quarter with universally disappointing guidance. The current quarter is a sacrifice bunt, and everything depends on Nokia nailing the holidays this year. Add Nokia to your Foolish watchlist to keep a close eye on the Windows gambit, but be prepared for salty language and unhappy endings.