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.
WALT DISNEY COMPANY
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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