Shares of

McAfee

(MFE)

were up sharply Friday on news that the antivirus software maker posted

stronger-than-expected third-quarter results and boosted revenue guidance for the fourth quarter.

The stellar earnings report, delivered after the bell Thursday, came just hours after the company had announced that

Time Warner's

(TWX)

AOL service will give McAfee's security software to its millions of subscribers for free, and pay most of the associated costs.

The news pushed McAfee's shares past the 52-week high posted Wednesday. In recent trading, the stock was up $1.46, or 6.3%, to $24.82.

Although investors were obviously pleased with the strong quarter and guidance, there was some concern about the AOL deal. "It sounds like it will be profitable, but will it be as profitable as the earlier arrangement?" asked Gregg Moskowitz, who follows security software for the Susquehanna Financial Group. That concern is likely what prompted the stock to sell off a bit during Thursday's session, he said. (Susquehanna does not have an investment banking business.)

Similarly, Piper Jaffray analyst Gene Munster said, "the controversy surrounding this announcement centers on the trade-off between adding new subscribers and pricing pressure related to these agreements. McAfee's position is the unit growth opportunity outweighs the downside from pricing pressure. Our take is that it's too early to determine how the market will play out." (The company does not have an investment banking relationship with McAfee.)

AOL has been selling McAfee's VirusScan Online to its subscribers for $2.95 a month; McAfee sells it for $39.99 a year. Now it will be included in AOL's latest software release and available by download to subscribers who would like to use it with older versions.

On a call with analysts after the close, McAfee CEO George Samenuk declined to detail the arrangement with AOL, but did say that it "will be very profitable for AOL and for McAfee ... and will give us a more reliable revenue stream." AOL, he said, will pay for customer support and customer acquisition, both big-ticket items, which will help lower McAfee's operating expenses. AOL will pay license revenue to McAfee every quarter.

His argument seemed to sway Goldman Sachs analyst Sarah Friar, who said Friday the deal will likely win new customers, giving McAfee opportunity to sell them related products. She also said, "we believe the antivirus market is still significantly under-penetrated. With nearly 800 million Internet users worldwide, we believe there is ample greenfield opportunity in the consumer market," she wrote in a note to clients. (Goldman Sachs has an investment banking relationship with McAfee.)

Indeed, investors worrying that McAfee's new deal with AOL could

steal business from larger rival

Symantec

(SYMC) - Get Report

pushed that company's shares down $3.43, or 5.8%, to $55.94 in recent trading.

Several sell-side analysts raised their price targets on McAfee to the $28 to $30 range, but there at least one analyst said the expected entry of

Microsoft

(MSFT) - Get Report

into the antivirus business implies a compression of multiples in the future.

Richard Smith of Garban Institutional Equities said McAfee is already trading at a significant premium to its peers (42.5 times fiscal 2005 estimates vs. 32.1 times for its rivals) "and valuations will have to come down when Microsoft enters the antivirus market sometime in the next year we believe, and perhaps sooner."