Updated from 11:33 a.m. EDT

Shares of

Motorola

(MOT)

plummeted in early trading Tuesday after the company said it would not meet Wall Street's expectations for the second quarter as sales of cheaper phones are cutting profit margins.

The Schaumburg, Ill.-based telecommunications equipment company told analysts in a conference call that it expected to post second-quarter earnings of 67 cents per share, 3 cents short of analysts' estimates. Motorola said it expected revenues of $9.5 billion for the quarter, and full-year revenues of $39.8 billion and earnings per share of $3.14. Analysts surveyed by

First Call/Thomson Financial

project full-year earnings of $3.18.

Motorola dropped 25, or 17%, to 124 1/4 in midday trading. (Motorola closed down 26 3/4, or 18%, at 123 1/2).

The profit warning comes on the heels of a strong first quarter for the company, the world's second-largest maker of cellular phones. On Monday night, the company said that its first-quarter earnings more than

doubled, to $144 million, or 59 cents per share.

"The Street really has missed the forest for the trees here," said Pete Peterson, analyst with

Prudential Volpe Technology

in San Francisco.

Motorola beat Wall Street's revenue projections, demonstrated strong growth in its semiconductor and network systems segments, and its cell phone sales for the first quarter rose 8% over the fourth quarter, a number Peterson calls "extraordinary."

The first quarter typically is the weakest sales period in the space, and the fourth quarter is typically the strongest, so to show strong sequential sales growth "is a bullish indicator," said Peterson, who upgraded his rating on Motorola to a strong buy from accumulate on Tuesday's stock action. His firm underwrote a debt offering for Motorola about four years ago. "Add a little higher margin to these numbers and it's a stellar quarter," Peterson said.

Motorola has seen its margins squeezed because it was forced into buying components in the middle of the quarter at a much higher price, said Marc Cabi, analyst with

Credit Suisse First Boston

in San Francisco. "If you depend on the spot market, as Motorola did, you're going to be paying a premium price in this tight market," Cabi said.

Motorola competitor

Nokia

(NOK) - Get Report

forecast sales much more aggressively for the year -- roughly 10% higher than Motorola's sales projections -- and as a result probably bought components accordingly, Cabi said. As a result, Nokia will probably not see the same margin squeeze as Motorola, he said.

That said, once Motorola works through the component issue over the next quarter or so, it has enough new products in the pipeline to position it well heading into the fourth quarter, the key sales period for companies in the cell phone space, Cabi noted. He rates the stock a hold. CSFB has not done any underwriting for the company.