NEW YORK (CNNfn) - Shares of Nortel Networks tumbled more than 27 percent Wednesday on disappointing revenue news, prompting both a steep decline in the Nasdaq after optical network-related stocks fell, and a halt of trading in Nortel's stock on the Toronto Stock Exchange.|
In late afternoon trading, Nortel (NT: Research, Estimates) plunged $17.31 to $46, a 27.3 percent loss. And anything related to the optical network sector also sank, including Cisco, JDS Uniphase, as well as chip concerns, leading the Nasdaq down 153.37 to 3266.42, to a loss of 4.48 percent.
In Canada, officials halted the trading of Nortel on the Toronto Stock Exchange at 11:58 a.m. ET, amid heavy volume and said it may not resume again on Wednesday. The stock dived early Wednesday C$24.44, or 25.55 percent, to C$71.55.
The Ontario-based firm, which also trades on the New York Stock Exchange, is a major market mover on the Toronto Stock Exchange, making up 30 percent of its TSE 300 composite index.
Sell-off sparked by revenue miss
After the markets closed Tuesday, Nortel reported third-quarter earnings that beat expectations, but revenue that was lower than most had expected.
Moreover, at 90 percent, sales of optical networking systems grew much lower than several analysts' expectations of about 120-to-125 percent growth during the quarter. Nortel executives blamed that shortfall on its customers amassing inventories amid tight supply of optical systems.
That created a bottleneck in the distribution channel, which some analysts said could weigh on Nortel, and the companies that supply it with the components it uses to build those systems, for several quarters.
"It will take a little while to work through the supply chain," Lehman Brothers analyst Arnab Chanda said in an interview with CNNfn.com Wednesday. "That could have an impact this quarter and the next quarter on the companies that sell into Nortel as it ripples down."
In afternoon trade Wednesday, shares of Nortel (NT: Research, Estimates) tumbled $17.50 to $45.81, a 24.6 percent decline. Meanwhile, Nortel competitors Cisco (CSCO: Research, Estimates) fell $3.25, or 5.9 percent, to $51.62; and Lucent (LU: Research, Estimates) fell $1.25, or nearly 6 percent, to $20.38.
Part of Nortel's decline on Wednesday can also be attributed to investors holding the company to loftier expectations to not just meet expectations, but top them as well, according to SG Cowen analyst Christin Armacost.
"There's an expectation built into Nortel's valuation for the company to outperform relative to expectation and with all of the indications prior to the call that the demand for optical remained quite strong, especially with service providers," Armacost said in an interview Wednesday.
Revenue miss pressures other stocks
Nortel is not suffering alone. While investors wonder how quickly Nortel can recover, optical equipment component suppliers were taking a beating as well.
Further pressuring these stocks, which have been some of the market's top performers, were a raft of downgrades from Lehman's Chanda, noting that the inventory build-up among Nortel's customers could create near-term weakness for the component vendors.
Among them are JDS Uniphase (JDSU: Research, Estimates), the largest supplier of optical network components, which Chandra downgraded to "neutral" from "outperform." It's shares fell 23.19, or $23.4 percent, to $71.88.
He also downgraded fiber-optic chip makers PMC-Sierra (PMCS: Research, Estimates) and Vitesse (VTSS: Research, Estimates) to "outperform" from "buy." PMC-Sierra shares fell $34.94, or 17.6 percent, to $163.94. Vitesse dropped $10.75, or 16 percent, to $56.75.
Communications chip maker Applied Micro Circuits (AMCC: Research, Estimates) also plunged, trading 51.56 lower at 146.75, a 26 percent decline. SG Cowen analyst Drew Peck downgraded that stock to "buy" from "strong buy," citing the company's large exposure to Nortel.
"Applied is one of the companies most tightly associated with Nortel, which at one point, represented 43 percent of Applied's sales," Peck said in a research note. "That figure has dropped dramatically, to about 20 percent, during the last two quarters, but it still is a material exposure."
Peck also pointed out that Nortel's problems do not signal a slowdown in growth in the fiber-optic business. In contrast to makers of chips for personal computers, he said demand for optical networking chips will "easily catch up and surpass supply in 2001."
Merrill Lynch's Mark Lipacis sprang to the defense of Applied Micro Wednesday, reiterating a "buy" rating on the stock. "We're defending the stock because we had expected Nortel to decline as a percentage of revenue," Lipacis said in an interview. "The dynamics that Nortel was talking about I think were already built into [Applied Micro's] numbers."
Lipacis also stressed that Nortel's troubles do not spell disaster for the fiber-optic industry, which he expects to continue to grow strongly for another five years.
"Nortel is the bellwether, so the concern is that the issues that Nortel was talking about are industry-wide," he said. "We think they're company-specific. This is a 5-to-7 year investment cycle, and we're only in the second year of that cycle. We're not ready to call the end of the communications revolution."