January 8, 1999
Disney, an Internet Stock?
By Joshua Albertson
You never know when Wall Street will suddenly decide your company
deserves an Internet-stock-like valuation, even when it already is an
Internet stock. Just take a look at the surreal rise in the shares of
Broadcast.com this week. But in this, the final part of our series, Not an
Internet Stock…Yet, we decided to focus on traditional media and
entertainment companies, most of which haven't exactly taken the Net by
storm. Here's one that one of these days may get it right.
M - I - C -- See you on the
Internet! -- K - E - Y -- Why?
Because it's the magic kingdom
of new media! -- M - O - U - S - E.
Get ready for the world's largest
and most ubiquitous media and
entertainment company to
become a Web giant. The Walt
Disney Company (DIS) is
currently presenting its new portal
site, Go Network, in beta form,
and expects a full-scale launch
sometime this spring. Some
analysts predict that in less than
one year, the site, which is a joint
venture with Infoseek (SEEK),
will trail only Yahoo! (YHOO) and
AOL (AOL) in viewership.
Even if that comes to pass, it doesn't mean that Disney investors should be
preparing for a Yahoo!-like stock ascent. But it does mean that it might be
time to start thinking about Disney in terms of a different kind of Mouse --
i.e., the one PC users employ to point and click.
"It will be hard to imagine anyone who is alive who is not aware of the Go
Network," says Stewart Halpern, principal and senior entertainment analyst
at ING Baring Furman Selz, giving a nod to Disney's marketing prowess.
Disney, the fourth and final entry in SmartMoney.com's Not An Internet
Stock...Yet series, has been building an Internet presence for some time
now. ESPN.com, ABCNews.com and Disney.com, all Disney properties,
are among the Web's most popular sites. But it was only when Disney
agreed to acquire a 43% stake in Infoseek, a Sunnyvale, Calif.-based portal
concern, this summer that the company's Web intentions appeared in
full-color animation.
The Infoseek partnership, and the Go product, should give Disney a face on
the Web, a way to leverage the Disney brand in cyberspace. And that, say
analysts, is what has been missing from the Internet strategies of the major
media and entertainment players. "One of the problems with the Internet [for
media companies] has been that it makes you have a front door," says
Melissa Bane, project manager of Internet market strategies at the Yankee
Group.
The need for centralization on the Web often contradicts the traditional
strategies of media concerns, many of which operate disparate businesses
across multiple platforms. "I think the ideal [Internet strategy] is to have it
centrally managed, and if they haven't done it yet, they're going to see
some bumps on the road," Bane warns.
Of course, there have been a number of media successes on the Web to
date. Time Warner (TWX), whose earlier "front door," Pathfinder, failed to
lure viewers to the company's content offerings, has a powerful stand-alone
site in CNN.com. NBC (a unit of General Electric (GE)) owns a 5% stake
in C|net and partners with Microsoft in the news game. And CBS (CBS) just
added a content-sharing agreement with AOL to its Internet portfolio, which
already includes investments SportLine USA (SPLN) and
Marketwatch.com.
But nobody this side of cyberspace has launched a project as ambitious as
Disney's. And there is little reason to believe that the strength of the Disney
name will not carry some weight in the new medium. "If you were to rank
the importance of technology vs. brand [in establishing a successful portal
site], the brand is worth 95% and the technology is worth 5%," says Bruce
Smith, who covers Lycos (LCOS), Excite (XCIT), Infoseek and Yahoo! for
Jefferies & Co. "This is a branding war, and in a branding war, the company
that can brand the best wins."
Still, as a seemingly limitless collection of "Internet" stocks climbs through
the roof, nobody's confusing Disney with Amazon.com (AMZN) or AOL.
Shares in DIS have appreciated 44% since bottoming at 22.50 in early
October, but are still 24% off their spring high and down marginally over the
last 52 weeks.
It would be naive to simply compare the performance of Disney, whose
holdings include theme parks, movies, television stations and cruise ships,
with that of the Internet pure-plays. And as CEO Michael Eisner admitted to
investors earlier this week in his annual letter to shareholders, the company
had its share of problems in 1998.
But, as Halpern points out, Disney is getting little credit for its Internet
presence beyond its share in Infoseek, which amounts to approximately
$700 million. AOL's market capitalization of $68 billion exceeds that of the
entire Walt Disney Company ($65 billion).
Nonetheless, Disney investors are not in the same group as Internet stock
players. And that matters when it comes down to setting valuations. "The
fact is, and is likely to remain, that the Walt Disney Company is an
earnings-driven growth stock," says Halpern. "And the Internet has
phenomenal growth characteristics but is not yet having much impact on
anybody's earnings."
Meanwhile, a significant slowdown in Disney's growth rate -- earnings are
expected to be flat in 1999 after a meager 5% jump in 1998 -- has many
Wall Street analysts on the sidelines. According to Zacks Investment
Research, 12 of the 24 pundits who track Disney currently rate the issue a
Hold and only two call it a Strong Buy.
And those same analysts, who generally track non-Internet media and
entertainment concerns, are not jumping to adjust their models to account
for Internet exuberance. "It's just not meaningful right now," says Merrill
Lynch's Jessica Reif-Cohen of Disney's cyberspace presence. "And to give
a value to that is actually speculative, which is not what I'm trying to do."
Others warn that once the Internet stock bubble bursts, investors will begin
to realize that only one-quarter of American homes are online and only a
handful of companies are making any money on the Net. "The whole world
won't take place on the Internet. It's just another channel. It's an exciting
channel, but it's just another channel," says Bane.
But that hasn't stopped investors from migrating to a wide swath of Internet
plays through 1998. And if the Disney muscle makes Go go, then it's not
hard to imagine seeing DIS listed alongside the Internet stock winners.
Says Halpern: "People who have not necessarily been the traditional Disney
investors should be able to start seeing Disney more clearly as an Internet
play, or at least appreciate the Internet value that is currently hidden within
the Walt Disney Company."
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