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The truth about the MetroPCS train wreck

FORTUNE — How could yesterday’s seemingly small miss in MetroPCS’ (PCS) second quarter earnings end up whacking 37% off the stock and causing panic across a wide swath of the cellular industry? Shares in competitors Leap Wireless (LEAP) and Sprint (S) got pummeled — down 21% and nearly 7%, respectively. Meanwhile the stocks of the two biggest cellular carriers, AT&T (T) and Verizon (VZ), sailed along, beating the broader market. Talk about a disconnect.

The companies that got shellacked yesterday all focus on the lower-income end of the mobile market. Today’s cellular market has essentially split in two: some companies selling expensive cellular phones tied to long-term contracts, others sell the cheap, no-contract variety.

While Verizon and AT&T make fat profits selling the likes of Apple’s (AAPL) iPhone, MetroPCS has long been the prime example of how to rake in profits pushing basic, no-frills handsets. The key to its model has always been simple: keep costs far lower than everyone else. The company largely does this by only building wireless networks in dense urban areas where it takes fewer towers to cover more people. MetroPCS CEO Roger Linquist, a former McKinsey consultant, views low costs as his key strategic advantage. He’s been ruthless about squeezing out efficiencies wherever he can.

The typical MetroPCS customer sends the company a check for $40.49 per month, whereas the average Verizon pre-paid customer generates $54 in revenue. But the math works out just fine for Linquist since it costs MetroPCS under $20 a month to offer service. That leaves a plump gross margin of over 50%. And since last year, those very economics have made MetroPCS the cellular industry’s hottest stock.  Even after today’s plunge, PCS stock is still up 35% since the beginning of 2010, compared to a 14% gain in the S&P 500 and single digit gains for AT&T and Verizon in the same period. (See chart above.)

The question now is, can the company’s stock claw its way back?  Yesterday’s tumble reflects increasingly visible cracks in the budget provider’s armor. Costs are continuing to rise. In 2009, MetroPCS had to spend just $16.82 a month to serve its average subscriber, and the cost was falling as it added more customers to its existing fixed-cost networks.  In the last two years, the trend has reversed. Yesterday, the company said it cost $18.94 to serve a customer in the second quarter,  up 6% in a year. Meanwhile the amount of revenue each user brought in rose only 1.6% in the same period.

The obvious culprit for this gradual increase in costs is a shift from networks that carried phone calls to a new world of “4G” networks in which data downloads are becoming the dominant form of traffic. Building those new networks costs money, a lot of money. The $265 million the company invested in capital expenditures in the last quarter was well ahead of Wall Street forecasts.

In some ways, the news out of MetroPCS merely confirms for investors something they should already know. As the mix of the cellular business shifts from voice to data, it will often put increasing pressure on margins — as well as investors.