Updated from 12:48 p.m. ET

The networking sector got walloped Wednesday.

Shares in networking-equipment stalwart

Nortel

(NT)

plunged after the company on Tuesday disclosed third-quarter revenue that failed to meet Wall Street's highest expectations. Shares in other optical highfliers followed suit, as Nortel's failure to match the second quarter's 150% optical-equipment revenue growth sent shivers through a highly priced sector.

The sharp declines came despite the fact that Nortel noted the underlying strength of its business and remained steadfastly bullish, predicting that its customers would boost their spending by 20% to 25% for 2001.

"The short-term bubble has burst," says analyst David Toung of

Argus Research

, which hasn't done investment banking for Nortel and rates the stock a buy. "Now we will see a sorting-out with more normal growth."

Nortel dropped $18.31, or 29%, to $45.

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JDS Uniphase

(JDSU)

also plunged, falling $24.06, or 25%, to $71. And

Corning

was down $16.63, or 18%, at $76.88.

Being Bullish

Nortel, for its part, stood by the strength of its business, which has propelled the stock to more than triple over the last year. Third-quarter earnings jumped to 18 cents a share, excluding certain items, from 11 cents a year ago. Revenue jumped 42% to $7.31 billion in the latest quarter, which left Nortel a bit "light" of revenue expectations, Toung says. Optical-equipment sales jumped 90%, showing a strong performance but falling short of second-quarter growth figures.

"We are continuing to see strong demand," Nortel CEO John Roth said on a conference call with analysts Tuesday evening. "The market outlook from our perspective continues to look very firm. If anything, we continue to see that capital expenditure on a long-term basis continues to move upward, especially for the customers we serve."

The culprit of the sharp selloff was Nortel's revenue shortfall in optical sales. In September, the company had said that $12 billion in optical-equipment sales was possible, but told analysts Tuesday that better than $10 billion was a more accurate figure for the year. Nortel says that during the quarter, its customers began stockpiling its equipment out of fear that the red-hot demand for optical-networking goods would continue to outstrip supply. Because customers don't pay for optical gear until it's installed in an operational network, Nortel shipped far more communications equipment to customers than it was able to record as revenue.

"I really view the inventory issue as a good news item because, having restored our intervals back to traditional lead time, there's no longer a need for our customers to hedge what we are going to do," Nortel CEO Roth continued. "And that gives us much greater visibility in terms of how they are deploying the equipment, as opposed to shipping it to warehouses."

The Fallout

"This will have repercussions further down the supply chain, like

at JDS and Corning," says analyst Toung of Argus Research. "It requires careful planning as to how much capacity to bring on line."

Given Nortel's continued faith, Wednesday's stock moves may soon look like an overreaction. But perhaps only time will tell whether that's the case.