Wall Street turned a jaundiced eye on Nextel's ( NXTL) shiny numbers Wednesday. After
nailing its second-quarter earnings report Wednesday morning, Nextel saw its shares drop 5%. The setback came as surly investors gnashed their teeth about big spending decisions looming at the fast-growing, but debt-laden, wireless service provider. Nextel's conundrum centers on the evolving and closely watched high-speed wireless data arena. If the company stands pat, it risks losing a lucrative share of the business services market. But engaging in a costly network-expansion war, while facing billions of dollars in potential expenses related to a government-backed radio spectrum swap, could break the bank. The threat comes from deep-pocketed rivals like Verizon Wireless -- a joint venture of Verizon ( VZ) and Vodafone ( VOD) -- and Sprint ( FON). Both are charging ahead with network upgrades that will better position them to offer fast mobile Internet access. After a long honeymoon in which Nextel surged fivefold over the space of a year, skeptics have turned their focus on whether the company has reached its peak. Sure, the company is a popular profit leader in a robust industry. But investors know competition in Nextel's lucrative walkie-talkie niche is only growing more fierce. As a result, Nextel shares have stagnated during 2004 in spite of massive gains in users, earnings and revenue. On Wednesday, the stock slid $1.21 to $24.79.
Some analysts say only skeptics would care to highlight those costs. "People who have been paying attention shouldn't have been surprised by the costs of Boost and Flarion," says a Wall Street analyst with a buy rating whose firm does underwriting for Nextel. "And of course, there were legal fees." In an interview Wednesday, Nextel CFO Paul Saleh emphasized the company's profit leadership. "I think people lose perspective," says Saleh. "We are posting 43% margins, which is far better than any of our competitors. It's not at risk. We have been there for some time."