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When Growth Trumps Earnings

One company posted a net loss of 27 cents per share, but beat street estimates. The other reported a Q1 profit of 32 cents per share, also beating forecasts, but fell slightly short of some revenue-growth predictions.

So whose stock was punished by investors Tuesday? If you had guessed the bleeder's, you are the weakest link.

Indeed, shares of that particular link -- access provider EarthLink -- rose 6.0% to $11.55 Tuesday after the company narrowed its Q1 loss to 27 cents from 43 cents per share a year ago. Analysts had expected a per-share net loss of 36 cents.

The profitable company, firewall market leader Check Point Software Technologies , tumbled 14.4% to $62 Tuesday despite topping EPS forecasts of 29 cents and despite an 86% increase in sales over last year's first quarter.

However, CHKP's revenues of $145 million were a bit less than the $147 million to $150 million that some Wall Street watchers had predicted.

Two things contributed to the negative ticker reaction: 1) Concern that the slowing economy is finally catching up to the security software powerhouse, and 2) the (belated) realization that CHKP shares are overpriced.

While Check Point's year-over-year sales growth looks impressive, sequential quarterly revenue growth is down dramatically. Q1 revenue was only 3.3% above Q4's $140 million. From last year's third quarter to the fourth, sales increased 21%; from Q2 to Q3, revenue grew by 28%.

Sequential quarterly growth in net income also slowed. First quarter net income of $83.7 million barely exceeded Q4's net profit of $81 million. From last year's Q3 to Q4, net profit increased 31%.

Last year Check Point was the top-performing major Internet stock, with an annual gain of 169%. Of course, this also made it one of the most overvalued stocks. And even though CHKP shares have dropped 30.4% so far in 2001, they still trade at 52.3x trailing 12 months' earnings of $270 million.

EarthLink is one of this year's biggest board gainers, with shares climbing 130% since Dec. 29. Investors have been willing to overlook the company's losses as its broadband strategy continues to unfold. ELNK more than tripled the number of subscribers to its DSL service in Q1, helping to increase sales 34% to $294.9 million from the year-ago quarter. ELNK forecasts its broadband subscriber base to reach a half-million by year's end. That would be a 74% jump from the 288,000 reported through March 31.

And while the company's goal of attaining cash-flow profitability in the fourth quarter seems ambitious, investors -- based on Tuesdays' trading -- seem comfortable with that timeline.