In light of the strong results from Motorola
Well, investors made a bad call, as the stock fell 11.65% to $15.78 Thursday.
Net income increased 15% to 799 million euros in the second quarter. That came to 0.18 euros a share, which compares with the Street's expectations of 0.19 euros a share. Sales were up 25%, and net of special items from Q2 2005 and Q2 2004, net income was up 41%. No doubt, Nokia is selling large amounts of phones -- hitting 60.8 million units in the second quarter, which was a 34% increase from last year.
I know what you're looking at -- a 34% increase in handset volumes versus a 25% sales increase. So, what's the problem? To find growth, Nokia is venturing into emerging markets, such as China and Russia. Unfortunately, the pricing in these markets is tougher, with not as many opportunities to sell high-end phones, which is putting pressure on Nokia's overall margins. Now this isn't a horrible thing, but it also isn't quite the panacea the Street was seeking.
Nokia is looking out for the long term by penetrating emerging markets. But it will take some time for the margins to improve as these consumers upgrade to premium handsets. Nokia appears to have positioned itself well because gaining recognition in these markets while they're still developing will give it an important market presence moving forward. For the shorter term, Nokia will need to focus more on cost-cutting to deal with this market.
Unfortunately, Nokia thinks the weakness will continue. For the third quarter, the company pegs earnings per share at 0.14 to 0.17 euros. The Street was looking for 0.20 euros per share.
The growth story -- at least in the short term -- appears to belong to Motorola, which I wrote about this week. That company is growing its market share, most importantly with a premium product line.
Fool contributor Tom Taulli does not own shares mentioned in this article.