Motorola's Stock: Where Now?

Motorola blew yet another quarter Thursday night, proving that secular growth in wireless is not a guarantee of strong results for all handset makers. The company cited its handset business for the reduction in fourth quarter guidance, and I believe Ed Zander will continue to struggle with results amidst slowing handset growth, ASP erosion, new market entrants that compete well against the tired RAZR, and integration risk following a spate of mid and large sized acquisitions.

Motorola's problems began in the June quarter, in my opinion. I wrote a very bearish article for my previous employer ahead of the company's second quarter earnings report. Most analysts were forecasting cumulative RAZR shipments to eclipse the 50 million mark in the quarter, but Motorola didn't report its 50 millionth RAZR shipment until after the quarter ended. Also, management had set out on a very aggressive smartphone campaign with an inferior product in the Moto Q. Lastly, the company's equipment business was suffering from weak demand, a point management made clear at an investor conference during the quarter.

Of course, Motorola came out and not only beat estimates, but issued blow out guidance for the third quarter. However, Thursday night's report from the company confirms my earlier beliefs, and if management had been responsible in its public forecasting, the stock likely wouldn't be down more than 25% from its highs. For an example on how to play analysts, see RIMM, whose Street estimates have largely not changed much from 24 months ago while the stock has doubled.

Now Motorola faces an uphill battle to integrate Symbol Technologies and GoodLink, two recent acquisitions. At the same time, its handset business remains dependant on one form factor -- the RAZR -- albeit in different variations. Without innovation on the handset site, the company will fail to maintain ASPs at current levels. And increased development costs as the RAZR reaches the end of its shelf life, or at least periods of sequential growth in R&D costs, will further weigh on margins.

Ed Zander is a great operator who has turned the company around through tight cost controls and the success of the RAZR. But with very little left to squeeze out of the operating model and new Motorola phones lacking compared to the Blackberry Pearl, the set-top box division might be the only bright spot in Motorola's portfolio