Disney Internet's Compaq Tie-Up Fails to Excite Investors

Stock of the Mouse's Web arm continues to tumble.
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Disney Internet Group (DIG) - Get Report announced two deals Thursday in an effort to dig the company, and its stock, out of a hole.

But on a day when plenty of Internet stocks were finding that rock bottom was even lower than they'd imagined, Disney Internet proved to be no exception, slipping 44 cents to $4.62 after bouncing off a 52-week low of $4.06. The stock, which tracks the Internet and direct marketing businesses of

Walt Disney

(DIS) - Get Report

, had traded as high as $33.31 this year.

On Thursday, the company made separate announcements symbolizing where it's coming from and where it's going. Yet in spelling out the terms of its continuing transformation, Disney Internet failed to provide investors with compelling detail, notably in unveiling its deal with

Compaq

(CPQ)

.

Diverging Disneys
Disney (flat line) and Internet tracker (going to zero)

Disney Internet is selling its

Infoseek Japan

property, which it calls the fourth-largest search portal in Japan, to e-commerce company

Rakuten

for what a spokeswoman said was roughly $81 million in cash. Disney Internet says the deal includes "an ongoing, strategic relationship" that will give Disney's content sites preferred status on Infoseek Japan.

But the Street was paying more attention to the second deal, one in which Compaq will advertise on Disney Internet sites, Compaq will become the preferred technology provider to Disney, and Compaq will cede

Disney.com

,

ESPN.com

,

ABC.com

and

ABCNEWS.com

"prominent positions" on Compaq computers and Internet access devices. It has yet to be determined whether this prominent positioning will be in the form of onscreen icons or actual keys on Compaq computer keyboards, the spokeswoman says.

Disney Internet President Steve Wadsworth said the marketing/advertising partnership was the company's largest to date, and Disney and Compaq valued the three-year deal at more than $100 million, though they wouldn't disclose how that figure breaks down, or whether either of the companies would be spending more than the other on products and services in the deal. It appears to be the first major deal for Disney Internet since it announced an online auction partnership with

eBay

(EBAY) - Get Report

earlier this year.

Investors aren't biting yet. Considering the growing distrust of money-losing, consumer-focused Internet stocks, and Disney's precipitous drop in direct-marketing sales, the wait-and-see attitude toward the morphing Disney Internet Group isn't surprising. In October, the company changed its flagship

GO.com

from a general-interest portal attempting to compete with the likes of

America Online

(AOL)

into an entertainment and leisure portal that highlights Disney properties such as ESPN.com and ABCNEWS.com.

By the Numbers

Still, one sell-side analyst thinks the situation doesn't make sense.

The fact that investors are valuing Disney's Internet properties at one-tenth of the revenue generated by

The Lion King

is "ridiculous," says Christopher Dixon, entertainment and new-media analyst for

UBS Warburg

. Disney Internet's market cap is about $720 million. "We're throwing the baby out with the bath water," he says.

Dixon says the Compaq deal is a good one for Disney because of the positioning it will get on Compaq hardware. "It's very important for companies to get as close to the screen as possible," he says. "The fact that Compaq has agreed to put buttons embedded into devices goes a long way to helping drive adoption of Disney's suite of services and applications."

Dixon, whose firm hasn't done underwriting for DIG, rates the stock a strong buy.