Check Point, Handspring Buck Earnings Drag

One is a steady profit-generator. The other swims in a deepening pool of red ink.

Yet investors greeted the latest earnings reports from firewall market leader Check Point Software Technologies and wireless device seller Handspring with nearly equal enthusiasm in early trading Wednesday.

Shares of Check Point were up 9.6% to $161.06 shortly before noon, after rising as high as $169 earlier in the session. Handspring shares, meanwhile, gained as much as 16% to $90 before easing back to $85, a 9.2% increase over Tuesday’s closing price of $77.88.

That any Internet company could garner strong support from this skeptical market these days is noteworthy, but in each case it won’t last: CHKP carries a high price tag that investors will eventually notice, while Handspring is overvalued and is losing money, which investors will notice sooner.

First, though, the quarterly numbers. Check Point’s were great. Net income for Q3 was $61.6 million, or 35 cents per share, up from $24.7 million, or 15 cents per share in the year-ago quarter. CHKP’s profits blew away consensus estimates of 26 cents per share.

Check Point’s revenues doubled to $116 million, primarily due to keen corporate interest in secure virtual private networks. CHKP owns 52% of that booming market.

Another figure that should impress investors is CHKP’s gross margin, which increased to 56% in the third quarter from 48% in Q2 and 43% in last year’s Q3.

And in a time when ‘Net companies are retrenching and downsizing revenue and earnings estimates, CHKP boldly raised its forecast for earnings and revenue growth next year to 50% from previous estimates of 35%-40%.

CHKP has soared 196% this year, second among ‘Net tickers only to Juniper Networks. For investors who jumped in earlier this year, it’s been a nice ride. However, for those looking now to hop aboard the CHKP express, the cost may be prohibitive, despite a 12.8% decline in share price from Oct. 2 through Tuesday’s close.

With a market capitalization of $24.5 billion, Check Point trades at 69x trailing 12 months’ revenues of $352.9 million. In contrast, other profitable blue-chippers such as Cisco Systems (20x TTM revenues), America Online (13.9x) and Yahoo (29.3x).

Handspring got a boost from its fiscal Q1 earnings report even with widening losses, in part because results beat street estimates. Net loss was $16.4 million, or 17 cents a share. That’s higher than the $9.2 million loss in last year’s first quarter, but lower than the previous quarter’s net loss of $19.5 million, or 45 cents per share.

Excluding amortization related to stock compensation, HAND’s net loss of 8 cents per share easily beat Wall Street guesstimates of a 12 cents per share net loss.

Revenue for Handspring in its first quarter was $70.5 million, a 36% increase over Q4.

Handspring competes directly against market leader Palm, and in fact was founded two years ago by Palm founders Jeff Hawkins and Donna Dubinsky. The company went public on June 21, closing at $26.94. Through Tuesday’s trading, HAND has gained 189% since its IPO.

Which means Handspring also is trading at a steep premium. Its market cap of $9.7 billion through Tuesday translates into a valuation of 56.7x TTM revenues of $172.4 million. Certainly that’s not as bad as the triple-digit valuations common among ‘Net stocks last year. Nonetheless, this is a company that is No. 2 in its market and expects to lose up to 52 cents per share for the fiscal year.

Rather than applying a tough set of new rules to Internet companies this year, loss-weary investors have applied a tough set of old rules, which emphasize fiscal soundness and profitability. But investors also have doled out some free passes to companies competing in hot, early-stage markets such as wireless and fiber optics, hence Handspring’s high-flying shares. Given the market’s volatility and renewed

acquaintance with reality in recent months, it’s only a matter of time before HAND gets yanked back to earth.

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