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2HRS2GO: BSkyB shares get ahead of themselves

First Reuters, now BSkyB.

Next thing you know, Elton John will sound the opening bell, given the way Rule Brittania has been playing loud and strong in the ears of some Internet investors this week. Yesterday, American depositary receipts of Reuters (Nasdaq: RTRSY) took off after the provider of news and financial data touted its plan to become an Internet-centric company.

Now Rupert Murdoch's UK-based TV company, British Sky Broadcasting Group (NYSE: BSY) is soaring -- U.S. ADRs gapped up more than 23 percent when American markets opened this morning and London-traded shares rose more than 20 percent for the day -- after the company said it would spend roughly $403 million over the next 12 to 18 months to develop its Sky.com portal and related websites.



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BSkyB released no specifics, other than CEO Tony Ball saying the money would pay for content and infrastructure, rather than heavy marketing. "We (already) have huge brand recognition in this market," Ball told analysts during this morning's quarterly conference call.

Oh, did I mention BSkyB released year-end results? Sorry, I forgot. Then again, the market probably did also.

After all, the company's overall growth for the December quarter, while stronger than some analyst estimates, wasn't mind-boggling. For that matter, BSkyB's Internet ambitions weren't exactly a big secret either, although the company until now hadn't set an investment target.

At least one brokerage firm, Merrill Lynch, predicted BSkyB would top published growth expectations.

"This new sum of the parts valuation is still substantially below the current share price," notes a Merrill research note released yesterday. "And so (it) expects further unquantifiable geographic and functional initiatives, or a faster penetration rate of SkyDigital than we are forecasting. ... We therefore believe there is no further scope for price appreciation in the intermediate term, as all potential good news appears discounted."

Which just goes to show you fundamental analysis has nothing to do with stock picking, to quote an unrelated story in The Wall Street Journal this morning. That WSJ article, incidentally, profiled a U.K. analyst known for his candor about overvalued Net stocks. He doesn't work for Merrill.

This morning's increase in BSkyB's NYSE price means a market cap boost of almost $10.4 billion. Or to use a metric based on the only financial numbers BSkyB has released, today's market expects a return of more than $25 for every $1 spent on Sky.com.

Note that it doesn't take much to move BSkyB shares higher; the gain of 36 1/8 so far today came on volume of just 43,000 shares. Normally less than 4,000 shares of BSkyB trade in a day. A handful of daytraders can push this stock by themselves, or a single institutional trade.

So the huge leap in BSkyB's price might be misleading. Still, someone out there seems crazy about the possibilities for the combination of the U.K.'s top TV brand and the Internet.

As an employee of a company with ties to a TV station and a long-time trade publishing stalwart, maybe I should have more faith in the ability to translate a traditional media brand into Internet success. And maybe the U.K. market has different dynamics than the U.S. online audience.

But for now, the longest track record comes from U.S. media firms, and so far, it's not that good. None of the traditional U.S. media giants -- with their widely-recognized brands, fistfuls of cash and enormous opportunities for cross-platform advertising -- are close to making money on the Internet.

Granted, BSkyB doesn't face as much direct competition as ABC, CBS, NBC, and CNN offer each other. But this is still the Internet, and there are still far too many online outlets for mainstream news and information. Even in the United Kingdom, whose media is far more concentrated than in the United States, you've got Internet alternatives to Sky.com, such as the BBC's portal. And the BBC's website seems a bit easier to navigate.

Don't get me wrong -- BSkyB is right to develop its portal. During the conference call, one analyst noted that the higher investment comes in the wake of a recent downgrade of BSkyB's credit rating, but Rupert Murdoch has never been one to worry about his leverage, so I'll give him the benefit of the doubt and assume the company can keep its cash flow going in the long run.

But a $10 billion run-up? Sorry, I don't have that much faith.

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