Steady sales growth helped Mercury Interactive ( MERQ) navigate the tech bust better than most of its peers. But an increasing emphasis on subscription sales has prompted consternation about how to value the application software maker.

The controversy over Mercury only seems to be rising: Mercury Interactive recently attracted the rare sell rating from one analyst and some investors claim the stock is too expensive, even as others rush to the firm's defense.

Although the stock is off more than 21% from its 52-week high as of Thursday's close, it's still too pricey, says Rich Parower, co-manager of the ( SGTRX) Seligman Global Technology fund. "We're GARP-y and we mean it," he quipped, referring to the growth-at-a-reasonable-price style of investing.

The problem for many investors is Mercury Interactive trades at nearly 40 times the 2004 consensus earnings estimate gathered by Thomson First Call vs. the 30-times benchmark for typical software companies.

But boosters of Mercury, whose products are used to test and manage application software, say the stock shouldn't be valued as a traditional software company. About three years ago, Mercury Interactive changed its business model and began selling its application performance management products as a multiyear subscription, a break from industry norms.

Traditionally, software companies sell software as a perpetual license in which they immediately recognize revenue from upfront sales.

Under the subscription model, however, the bulk of a sale is first recognized on a company's balance sheet as deferred revenue and then moves to the income statement over the contract's life. Consequently, Mercury's revenue -- and ultimately net income -- appear lower than if the company recognized all of the revenue upfront.

Lower earnings, in turn, make the company's stock look more expensive than its peers based on a price-to-earnings ratio.

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