Go Figure: Disney Internet Arm Draws Raves From Value Crowd - TheStreet

Go Figure: Disney Internet Arm Draws Raves From Value Crowd

Go is off more than 20% since its IPO, but a new Internet strategy could provide a spark.
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There's a group of investors on Wall Street who like to look for beaten-down dot-com names, targeting Net plays that are closer to earth than the

Yahoo!s

(YHOO)

and

Amazon.coms

(AMZN) - Get Report

of the world. Call them the value investors of the Internet.

Currently, one of their favorite picks is the also-ran portal company

Go.com

(GO) - Get Report

. A spinoff from

Disney

(DIS) - Get Report

, the tracking stock currently trades at around 10 times calendar year 2000 revenue estimates. That's near the bottom of a wide range of portal valuations. Yahoo!, for example, currently trades at about 100 times 2000 earnings.

But investors aren't looking at Go just because it's cheap. They're beginning to take interest in the company because it is recasting itself as a media, entertainment and leisure portal. With the backing of Disney's resources -- Go doesn't have to pay to get advertising on

ABC

, for instance -- and that niche focus, analysts are now saying the company could be positioned to be a major player on the Internet.

Best Foot Forward

"They're leading with their strengths," says Arthur Newman, an analyst at

Schroder & Co.

who gives the stock a 1 rating, the highest rating at his firm, which hasn't done underwriting for the company. "Most of the portals focus on commodity data; there's not much difference between them. But with Go,

ESPN

is a unique name in sports, and you can't play

Who Wants to Be a Millionaire?

anywhere other than ABC."

Do Not Pass Go
Go stock retreats since IPO

Source: BigCharts

The blockbuster merger planned by

America Online

(AOL)

and

Time Warner

(TWX)

could aid Go in another way. "The AOL-Time Warner deal shows the importance of having content and an online distribution system," says Todd McClone, a senior analyst at

Strong Funds

, which holds Go.com stock. "Now you have a company with a much lower multiple employing that same strategy."

Analysts reacted positively to Go.com's earnings report, which was released after the close

Wednesday. Go reported a loss of 30 cents a diluted share, narrower than the consensus estimate, which called for a 47-cent loss.

Perhaps more importantly, though, Disney CEO Michael Eisner gave analysts what they wanted to hear.

"A strategic focus on the entertainment, recreation, leisure and lifestyle categories, which are large but underserved, plays to our strengths," Eisner said during the call. "It is clear that the dynamics of the portal race are changing. We believe the winners will be those who offer clearly differentiated and unique services."

Heavy Hitters

Uniqueness could be the quality that allows Go to make some long-awaited headway. Go.com, the portal that emerged out of Disney's purchase of the

Infoseek

search engine, was originally cast as the gateway site into the

Go Network

, an amalgamation of Disney Web properties such as

Disney.com

,

ESPN.com

and

ABCNews.com

. But in that role, Go had the formidable task of competing directly against Internet heavy hitters America Online and Yahoo!. Launched as a tracking stock in November, Go is down more than 20% from its first-day closing price of 35 7/16.

And while sentiment is turning positive on its new focus, the company's plan still lacks specifics.

A trademark dispute with competitor

GoTo.com

(GOTO)

, in which GoTo has been able to prevent Go.com from using a traffic light logo on its site, has analysts concerned. Other issues revolve around Disney's apparent lack of a clear-cut broadband strategy.

"They haven't really articulated their strategy yet, and I don't think they've evaluated completely what their operations are going to be," says David Card, an analyst with Internet research firm

Jupiter Communications

. Another thing that bothers Card: While Disney has great "umbrella" brand, its assets don't necessarily integrate with one another.

"The fundamental problem with this is that the audiences of their stronger properties are not complementary," Card says. "You're not going to get traffic going from ESPN.com to Disney.com. It doesn't make sense."

Big Talk

Still, bullish investors are betting Disney will execute on the Internet. Eisner made a strong statement during the company's conference call about the company's ability to compete. "We don't have to pattern ourselves after an AOL-Time Warner," Eisner said, speaking to speculation that Disney would team with a partner like Yahoo! in the wake of that megamerger. "We have the assets to go our own way."

With a more specific strategy expected to emerge at Go.com in the near term, McClone likes the stock.

"The perception has been that Go.com is going to challenge Yahoo! and AOL, which people weren't willing to pay for," McClone says. "Once management starts talking about what the new strategy is going to be, I think you're going to see revenue accelerate, and people are going to take interest in the stock again."

Or in other words, Go's time may have come.