Inventory is evil. If it ain't moving, then it's just waiting to be written down.
RBC Capital Markets analyst Mark Sue thinks struggling Finnish smartphone maker Nokia (NYS: NOK) is about to eat some inventory. He thinks the second half of the year will be particularly rough and that the company will be forced to write down inventory to clear its supply channels, which are currently full of Lumia 800 and Lumia 900 devices.
Since these devices won't be upgradable to Microsoft (NAS: MSFT) Windows Phone 8, but will instead receive a topical upgrade to Windows Phone 7.8, Sue expects customers to hold off until they can get their hands on the newer devices once they're released. That's leading him to slash his estimates across the board.
In Nokia's first-quarter earnings release, the company noted that its overall channel inventory had increased on a sequential basis, which, while somewhat expected because of holiday seasonality, was admittedly on the "high end of our normal 4 to 6 week channel inventory range." At the end of the quarter, it was carrying its total inventory at approximately $2.9 billion.
With Research In Motion (NAS: RIMM) in much the same boat as Nokia, maybe it should also be worried about inventory writedowns. It doesn't have as much at risk, currently carrying just over $1 billion on its balance sheet, but that's partially because it already wrote down $485 million in PlayBooks late last year. Just like Nokia, RIM's next major operating system platform, BlackBerry 10, is a way off, so prospective buyers have plenty of reasons to wait. RIM may also be forced to slash prices to get those BlackBerrys moving while waiting.
Sue also expressed concern over Nokia's cash burn rate and thinks its coffers are now down to around $4.9 billion, compared with approximately $5.9 billion last quarter. It's also a concern that Microsoft is likely looking to diversify its smartphone hardware partner base, making the love in this relationship rather asymmetrical as Nokia is betting it all on Windows Phone, save for some mysterious backup plan.
Nokia investors have plenty more pain coming.
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