NEW YORK (CNN/Money) -
Let's get the good news out of the way first. Nokia's shocker of an earnings warning Tuesday morning was not a sign that first quarter tech earnings are going to be bad.
But it did show that tech investors have set the bar too high -- and that's a problem as we get set for a deluge of tech earnings over the next month.
Shares of the Finnish cell-phone giant plunged more than 18 percent Tuesday after the company said that earnings would come in at the low end of its guidance and that sales would be lower than expected (see more).
The news weighed on the entire market, a contributed a 1 percent decline in the Nasdaq.
But Nokia's warning is not an indication that the sky is falling. Growth is still good and even Nokia's revised numbers reflect that. Nokia said its total cell phone shipments increased 19 percent from a year ago.
"It's not that people are not buying cell phones," said Ren Zamora, an analyst with Loop Capital Markets.
In fact, Nokia said it expects total global cell phone volume to increase 25 percent in the first quarter, which is higher than many analysts were expecting. What's more, Nokia blamed poor execution, and not market conditions, for its sales miss.
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"Due to certain gaps in its product portfolio, mainly in the mid range, the company was not able to fully capitalize on positive market developments," the company said in a statement.
So rather than the industry being in bad shape, it looks like Nokia, the cell phone market leader, might have not been able to meet demand for some higher priced phones (think color screens and camera phones). As a result, it may have lost some share to competitors such as Samsung, Siemens and even Motorola, said Greg Gorbatenko, an analyst with Marquis Investment Research.
"It's not that the industry is weak. It's Nokia being weak," said Gorbatenko.
Nokia couldn't live up to the hype
The problem is that expectations are too high. Shares of Nokia (NOK: Research, Estimates) had gained 27 percent year-to-date before Tuesday's warning in anticipation of strong first quarter results. And once again, overly optimistic analysts fueled these unreasonably bullish hopes.
Consider this. The high end of Nokia's guidance range before it warned was actually below Wall Street's consensus estimate.
According to First Call, analysts were expecting Nokia to report earnings of 24 U.S. cents a share, which works out to about 20 euro cents a share, based on Tuesday's exchange rates. Yet, Nokia originally said in January that it expected earnings to be between 17 euro cents and 19 euro cents a share.
Investors setting themselves up for disappointment
The way investors reacted to the Nokia news is very telling. And I think it paints an ominous picture, as earnings become the main focus for tech investors over the next few weeks.
Yahoo! kicks off tech's latest earnings escapade in earnest when it reports its first quarter numbers on Wednesday. The results should be fantastic -- analysts are expecting earnings growth of 38 percent and a year-over-year sales increase of 76 percent.
What's more, guidance for the second quarter should be stellar. Current consensus estimates call for a 50 percent increase in earnings and 65 percent sales growth.
But it's safe to say that Yahoo! will be pounded like a piñata at a five year old's birthday party if it doesn't exceed the already lofty first quarter expectations and raise its second-quarter guidance.
Yahoo! is trading at 90 times 2004 earnings estimates. With a P/E of 90, investors don't want to hear that things are just okay or getting better. Whisper numbers are back in vogue and the market is demanding nothing less than perfection.
For the most part, that's true for tech stocks at large. The S&P Tech sector is trading at about 28 times 2004 earnings estimates, nearly a 50 percent premium to the broader market's multiple. Any sign of weakness, no matter how small, will be frowned upon.
Just ask Nokia.
Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking relationships with the companies.
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