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GoTo, Homestore Set To Party

Two Internet stocks blew out earnings estimates last night and were trading 10% higher in the premarket this morning.

However, we'll spare you the customary "Party Like It's 1999" line. This is 2001, and it takes a real company with real fundamentals to get a lift like that in this market. And GoTo.com and Homestore.com are two dot-coms with real business models.

Homestore beat pro forma estimates by 2 cents with 13-cent earnings, and raised full-year estimates. However, under the GAAP accounting that will be reported to the SEC, HOMS lost 67 cents a share, more than double the loss of a year ago. On a pro forma basis, HOMS stock trades at about 46 times this year's estimates and 26 times next year's estimates, a reasonable price for 70% pro forma earnings growth. However, we would prefer to see the company come closer to those numbers on a GAAP basis. If it could do that, that would be impressive.

GoTo beat estimates by 11 cents a share with a 6 cent-loss under GAAP accounting, and actually reported it that way. And they should: the company is on a fast track to real profitability. GoTo lost 42 cents a share a year ago, and 13 cents a share in the first quarter. The company raised third-quarter guidance by 12 cents to a profit of 2 cents a share, and raised 2002 estimates by 4 cents to a profit of 31 cents a share. Now that's growth. However, at $22-$23 a share, GOTO stock is fully priced for it at a forward PE of about 70.

Both companies share a business-to-business focus. Homestore has grown through a relationship with the National Association of Realtors and other professional subscriptions. Surprisingly, the company also boasts a pretty strong advertising base, no doubt due to the fact that its users are there to spend big money. GoTo's pay-per-click search service has thrived by providing Web sites with an alternative to advertising.

Both companies are not without risks. It's doubtful that strong housing sales will continue to hold up if the economy doesn't improve, but a slow economy might benefit Homestore by forcing the industry to search for more ways to move inventory. GoTo's biggest risk is probably dot-com clients going out of business.

Not surprisingly in a remarkably trendless market, both stocks' charts look pretty neutral here. Homestore was barely hanging on to its uptrend and a trading range between 25 and 37 before last night's earnings report. However, the stock had a bullish moving average crossover recently (50-day higher than the 200-day, a sign of a healthy stock). GoTo has formed a couple of upside consolidation patterns lately, which usually resolve to the downside, but the stock should clear its recent downtrend line around $22 this morning.