What's Wrong With Motricity?

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Mobile merchandiser and advertiser Motricity (Nasdaq: MOTR  ) hobbled into its second-quarter in bad shape. Share prices dropped 23% from the start of August amid the general market panic and some negative analyst attention. But that was nothing compared to the 53% plunge Motricity took when the report hit the newswires.

After just over a year on the market, Motricity shares have experienced a heady tripling followed by a heartbreaking 93% plunge.

The second quarter saw sales rising 14% year-over-year to $34.6 million while adjusted earnings dropped from $3.7 million to $2 million. That's not mind-blowingly awesome, but hardly cause to rip shares in half overnight.

The real damage
What really hurt was what management had to say in plain English. CEO Ryan Wuerch pinned the underperformance on "headwinds in our North America carrier business" and "increased competition in the international market which affected our ability to close new deals."

The ability to close new deals is pretty darn important, especially to a company with high-growth ambitions. That dinger was matched up with third-quarter guidance of about $32 million in revenue and a $4 million adjusted net loss. This is disappointing even to the management team that came up with the numbers; Wuerch said, "We are clearly not satisfied with the company's financial performance or our third quarter outlook."

Oh, and the company is looking for a new CFO and a replacement chief marketing officer. Sounds like a few important people didn't pull their weight -- at least not in Wuerch's eyes. The warnings signs are piling up here.

The former full-year guidance has been canceled because the market is changing too quickly to make any long-term projections. Jump over to the earnings call, and the reasons for this cloudy outlook becomes all too clear. The North American headwinds mainly come from "the mass adoption of smartphones at the expense of feature phones."

The company is rolling out some new features to brand-name customers Verizon (NYSE: VZ  ) and AT&T (NYSE: T  ) and also hopes to gain a foothold on various smartphone platforms. But the bulk of Motricity's business is still tied to the fading feature-phone category. That's a bad place to live nowadays.

What to do now
OK, so what does this all add up to?

This face-first plunge is directionally right but way overdone. Three months ago, I gave the stock a thumbs-up rating in CAPS because it looked cheap back then. The challenges seem greater now, but Motricity still has a chance to regain its old billion-dollar valuation if management can deliver on its domestic smartphone and international feature phone plans.

Another quarter of nonexistent visibility and my all-star CAPS portfolio will move on without Motricity. The telecom market is too full of quality stocks to suffer with an underperformer. For example, I have real cash in dividend champion France Telecom (NYSE: FTE  ) , and that CAPS status is getting help from mobile chip specialists Cirrus Logic (Nasdaq: CRUS  ) and RF Micro Devices (Nasdaq: RFMD  ) . At today's prices, I think investors should look at those stocks as more dependable investments if they're looking to play mobile growth.

Turnaround gamblers could buy Motricity here, and the stock is certainly interesting for a non-cash CAPS play or a spot on your watchlist. But most of us have no business putting real money on this stock today.

Fool contributor Anders Bylund owns shares of France Telecom but holds no other position in any of the companies discussed here. The Motley Fool owns shares of Cirrus Logic. Motley Fool newsletter services have recommended buying shares of AT&T and France Telecom. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio, follow him on Twitter or Google+, or peruse our Foolish disclosure policy.

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