Is Homestore.com ( HOMS) fit for condemnation -- or a fixer-upper simply in need of a little TLC?

That's what investors want to know after the online real estate company's shares have crumbled in recent days, losing 38% of their value just since last Tuesday -- the day Homestore disappointed investors by missing analysts' earnings targets and pushing back its target date for profitability. The shares were recently up by a few pennies to $2.14 in Tuesday trading.

Although the company still has its fans, even some of them admit that Homestore is still a work in progress. "This is arguably the harriest Internet turnaround out there," said Mark Mahaney, who covers the company for American Technology Research. (American does not do investment banking and Mahaney does not hold shares in Homestore.)

Homestore is the leading national real estate site on the Web. The company operates the official Web site of the National Association of Realtors and lists the vast majority of houses for sale by real estate agents. The company also offers advertisements for newly built homes and for rental apartments.

Investors and analysts once valued shares of Homestore, which reached $138 in January 2000, in the same neighborhood as Yahoo! ( YHOO), Amazon ( AMZN) and eBay ( EBAY).

Like those companies, Homestore's stock sunk in the subsequent market bust, but unlike them, Homestore's stock remained stuck in the mire after an accounting scandal and a subsequent inquiry by the Securities and Exchange Commission. Following its own investigation of the accounting matter, Homestore acknowledged that it had overstated its revenue and earnings in 2000 and 2001 by millions of dollars.

But the pain didn't stop there -- the company saw its revenue plunge in 2002 and again last year.

Reversing Course

Lately, however, the company seemed to be turning things around. Homestore has never posted a full-year profit as a public entity, but it began promising that black ink was just around the corner.

That promise looked to have some substance to it. Despite the revenue fall-off, Homestore shored up its bottom line in each of the last two years. In the first six months of this year, the company actually posted revenue growth. And in the latest quarter, Homestore narrowed its net loss to $4.3 million, or 3 cents a share, from $91.5 million, or 78 cents a share, in the year-ago period.

Meanwhile, the company's core media services segment posted an operating profit of $7.7 million in the second quarter, up from $5.4 million in the first quarter and a $361,000 loss in the year-ago period.

The company seemed to hit its inflection point in the first quarter, when it posted year-over-year revenue growth for the first time in two years, said Mahaney, who expects Homestore's fundamentals will continue to improve.

Because of what was seen as a fledgling turnaround, the company clearly disappointed analysts with its latest earnings report. Homestore attributed much of its problems to increased legal fees and costs related to complying with the Sarbanes-Oxley Act.

The legal fees are related to a shareholder suit that arose out of the company's accounting fiasco. Homestore reached a settlement agreement with the plaintiffs in the case, but that agreement is the subject of an appeal.

As for Sarbanes-Oxley, Homestore's complaint about rising administrative costs related to complying with the mandate to verify internal auditing controls echoes those made recently by other small-cap companies.

But it's hard to know whether such a complaint is legitimate or whether companies are simply using it as a convenient excuse to explain poor results, said Mark Argento, an analyst with Think Equity Partners. Regardless, Homestore should be able to overcome these administrative costs and start posting profits, he said.

"It's a turnaround story," Argento said. "Turnarounds take longer than you expect."

(ThinkEquity has no investment banking business with Homestore and Argento does not own the stock.)

For both Mahaney and Argento, Homestore's attraction is in its potential. While real estate agents in the U.S. spend about $4 billion annually on marketing and technology, Homestore sees little more than 5% of that spending, Mahaney noted.

"We're confident that the growth can come back," he said.

In addition, of the company's two million real estate listings, only about 25% of them have been enhanced by the agents who placed them with extra pictures or information, Argento estimated. Since the company now charges for each enhancement, the remaining 75% of its listings represent a considerable opportunity, he said.

"That's a key revenue driver," Argento said.

Investors' Worries

But a true turnaround is by no means guaranteed. Following the earnings report and conference call, at which the company said it wouldn't likely post a profit this year, investors expressed their doubts by selling shares. After losing 15% of its value on Thursday and another 23% on Friday, Homestore's stock dropped 11 cents, or 5%, on Monday to $2.11.

"Down here at Homestore's current stock price , it's getting a little stupid. I think it's pretty oversold," said Argento. Acknowledging that the company disappointed investors, he added: "That being said, we're in a market where the multiples are going down even for profitable Internet stocks."

But there's room for even more skepticism beyond quarterly expectations. While Homestore's second-quarter revenue growth of 5% was notable, it looks anemic compared with the company's Internet peers. That slow growth rate also could raise questions about the company's long-term outlook.

Given that the real estate market has boomed in recent years fueled by low interest rates, investors may have expected Homestore, as the leading online real estate site, to have done better on the top line. If the housing market slows with an interest rate rise, the company could have even more trouble boosting revenue and its bottom line.

"A slowing home market will hurt," acknowledged Mahaney.

In the meantime, the company is still struggling to bring all of its business segments into the black. The company's software business, for instance, saw sales fall 3% in the most recent quarter from the same period a year ago. While its bottom line improved from an operating loss of $1.8 million, the software business was still in the red, posting a $189,000 operating loss.

And while Homestore lost its prime national competitor after reaching a marketing deal with Microsoft's ( MSFT) MSN last year, the company still faces competition for home buyers' attention and agent listings from local real estate associations. The company depends on those associations for its own real estate listings, but real estate agents often point clients to their own local listings.

The company still should be able to attract real estate agents by allowing them to customize listings and brand themselves, things they can't often do on their local sites, said Mahaney. But, he added, the local sites remain a threat to the company.

" They are one of the biggest risks to Homestore's market opportunity," he said.