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.
To be sure, the Reston, Va., wireless shop had impressive numbers in key areas. It added 546,000 new subscribers, reduced monthly customer churn to 1.6% and bumped up average revenue per user to $70. But it was a slight bulge in costs that seemed to get the most attention on the company's earnings call Wednesday. The company said higher costs in the June quarter were fed by expansion of the Boost prepaid service plan, plus a wireless broadband trial using Flarion gear in Raleigh, N.C. Also padding the expense line: an unexplained increase in legal costs, stemming presumably from lobbying on the emergency services spectrum swap.