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Profitable Dot-coms

Another day of earnings season, and two more profitable dot-coms.

Priceline.com recorded its first-ever quarter of profitability yesterday, with pro form earnings of 5 cents a share, 4 cents above estimates, and GAAP earnings of a penny a share. The stock was trading up more than $1 in pre-market trading. The company beat revenue estimates by more than 20% at $364 million, and raised forward guidance.

And Register.com reported cash earnings (net income excluding amortization of goodwill related to acquisitions) of 13 cents a share, 2 cents better than estimates, and GAAP earnings of 5 cents a share. The stock was down slightly in pre-market trading.

Priceline's remarkable comeback has been well-documented - and thus is thoroughly built into the share price. The stock was undervalued at 1.06 a share at its December low, but at its current price north of $10 a share, it's overvalued.

Priceline earned $2.8 million in its first profitable quarter under the GAAP accounting it will report to the SEC. It carries a market cap of almost $2 billion. Those numbers do not add up by a long shot. Still, the stock has become a favorite of the momentum crowd and could well continue to run. But don't forget that you've got a trader on your hands; at these levels, Priceline is not an investment. The goal of investing is to compound your investment, not to wait for a company's earnings to compound to the point that its stock is fairly valued at the price you paid for it.

Still, Priceline's comeback is worth celebrating. As the big-name dot-com beaten down the most, its rise from the ashes is heartening. From its peak of 165 in April 1999 to its December 2000 trough, Priceline fell 99.36%.

Priceline's comeback is due in part to a surprising counter-cyclical trait of the company's business: as the economy has slowed, airlines are making more empty seats available to Priceline. Consumers have become much more cost-conscious in recent months, which has made online travel stocks one of the hottest Net sectors this year. If the economy remains slow, as it likely will, this trend could well continue for some time.

A look at Priceline's stock (see chart below) shows major resistance coming up in the 12-12.44 area, a big gap down from 18.63 in September. Support should be found at 7. A few items of note in the chart: notice how ADX, a trend indicator, was turning down during the stock's final descent from 5 to 1.06, an indication that the move was not a trend. ADX is turning down again now, and whichever way the stock is moving when ADX turns up could be a good indicator of the next trend. Also, stochastics in that chart are a ways from becoming overbought, which gives PCLN more upside potential.

Register.com is more reasonably valued at about 100 times trailing GAAP earnings, but that's still pretty expensive. The stock trades at about 26 times pro forma estimates for this year, however, so if the company can come close to achieving those targets without charges, it would be reasonably valued at current levels. The stock has support at 11.50 and 10, and 14 is first resistance (see chart below).