JDS Uniphase (NASDAQ:JDSU) shares are plunging today, hurt by a sizeable "earnings miss" yesterday, and guidance that didn't quite meet expectations, either. Investors are right to be upset. The sell-off is justified ... but not for the reasons the mainstream press is citing.

Listen to the professionals, and you'll assume that JDS's $0.13-per-share loss and 11% sales growth justify Thursday's 13% haircut. But that's just one quarter's news -- a brief speedbump on the highway to JDS's prosperity ...

Exit, stage left
... if JDS were on that highway in the first place. It's not. Let's take a break from Wall Street's short-term thinking here for a moment, and look at the bigger picture. Over the course of its fiscal 2008:

  • JDS grew revenue 9.5%
  • It tacked on nearly five percentage points to its gross margin (currently 38.6%).
  • But it posted an operating margin of negative 8.6%, and lost $0.10 per share.

How did JDS turn better gross margins into an even bigger operating loss? By allowing its costs to run amok. R&D spending increased 12% -- but I've got no objection to that. Tech firms need to invest in their tech. But I don't like that JDS increased its selling, general, and administrative spending at twice that rate -- 24%. This surge in operating costs has JDS now posting an operating margin worse than those of Agilent (NYSE:A), Coherent (NASDAQ:COHR), and Finisar (NASDAQ:FNSR) -- worse, in fact, than almost anyone other than Jim Cramer fave Bookham (NASDAQ:BKHM).

And by the way, where's the cash?
In addition to its continuing GAAP losses, we have a new reason to chastise JDS today. Remember what I wrote in Tuesday's Foolish Forecast? "Unless we learn tomorrow that free cash flow has fallen off a cliff, this means the buying window remains open to us"?

Well, FCF fell off that cliff. Trending toward $33 million as we headed into Q4, JDS instead generated a bare $9 million for the quarter. (Management has not released the most recent quarter's cash flow statement.) My best estimate now puts free cash flow for the year at $108 million.

Simply put, JDS's projected 15% growth rate does not support its new 21-times-FCF valuation. Until it does, I can't support the stock.

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Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.