Nortel’s stock fell by 26% after disappointing Q3 results.
Canadian network equipment manufacturer Nortel’s results, announced yesterday, showed operating earnings up 64% to 18 cents a share against forecasts of 17 cents. But revenues were slightly lower than anticipated. The results kicked off a bout of selling, reducing the company’s share price by 26%, as well as hitting share prices for other system equipment providers and component makers.
This doesn’t seem to make sense. The figures hardly read as bad news – the company’s revenues from its core business of optical networking grew by 90% in Q3. The problem is that even better results than this were expected, with analysts’ predictions for this at around 120%. This is a problem that many companies would rather like to be suffering from.
Even more positively for Nortel, the slow growth is not due to a shortage of demand. The company is the market leader in optical networks. Demand for these is booming at the moment, as they are seen as the cheapest way to meet the demand for increased bandwidth. The main problem is that the company has so successfully reduced lead times on its products, that service providers have reduced the amount of inventory they keep, since there is less danger of being caught short. This has been compounded by service providers’ inability to find enough qualified technicians to get the products Nortel has delivered actually working.
The former will not be a problem now inventories have been reduced; the latter should become less of a problem as labor supply eventually catches up with demand. Nortel is also winning many contracts in the European 3G market, which should also provide substantial revenues for the company over the next few years.
Nortel is doing rather well and is growing fast. Yesterday’s events have more to do with the imperfections of the stock market and of bank analysts, than it has to do with the company’s prospects. The share price fall yesterday should best be viewed as a correction.
