3 Reasons DreamWorks Animation's Stock Could Rise

DreamWorks' stock has had a brutal run lately. Here's how that might change.

Aug 13, 2014 at 1:58PM

DreamWorks Animation's (NASDAQ:DWA) stock has had a brutal run, dropping significantly over the last one-year, five-year, and 10-year time periods. Investors haven't been impressed as the film developer booked a loss on a major theatrical release in each of the last three years. 

DWA Chart

DWA data by YCharts.

Cost cuts haven't made up for the box office weakness. Through the first six months of this year, DreamWorks lost $58 million, enough to wipe out all of 2013's profit and make the last three years a complete bust in terms of earnings.

However, while there's no telling how the market will react to any particular news, a number of catalysts could send DreamWorks' stock higher over the longer term. Here are three of the biggest.

1. A box office winning streak

First and foremost, DreamWorks needs a string of wins at the box office. We're not talking just one hit, like The Croods was last year. While that film did well, its results were swamped by the disappointing follow-up performance of Turbo. That's why any DreamWorks' recovery likely will have to start with multiple successive scores in theaters. 


Source: DreamWorks.

After Mr. Peabody & Sherman's disappointment earlier this year, How to Train Your Dragon 2 could be the beginning of that run. Already one of the highest-grossing movies of the year, Dragon 2 has a strong shot at racking up even more revenue, particularly abroad. In fact, Wall Street analysts expect DreamWorks to post a 26% jump in third-quarter sales thanks to the success of that one film.

Investors have to hope that the next two movies, Penguins of Madagascar in November and Home next spring, see similar results. It's still too early to tell, but the films were well-received at last month's Comic-Con, where DreamWorks teased out some new details and actual footage.

2. More diverse revenue streams

The company hasn't made a secret of the fact that it aims to become more like Disney. That is, management wants to "transition DreamWorks Animation into a global branded family entertainment company." That's much easier said than done, as DreamWorks' film business is responsible for 70% of its revenue. That's down from almost 80% in 2011, but still very far from Disney's 15%.  

However, the company has made some good strides in growing its businesses that aren't tied directly to the box office. That progress includes consumer products sales, which grew last quarter thanks to the Dragon 2 hit. Those sales should also see a boost from a new brand, Felix the Cat, which DreamWorks just purchased and plans to market in the fashion and lifestyle categories. 

DreamWorks is also growing its television presence, powered by some major content deals with Netflix and other partners that, if you believe management, will help TV-based revenue reach $250 million next year, more than double last year's haul.  Once these moves start paying off, investors should reward the stock with a higher valuation, which would reflect the more predictable profit stream that a diverse entertainment business like Disney enjoys.

3. A new hit franchise

Finally, the establishment of a new hit property, one that can spawn rounds of sequels and secondary business income, could be transformative for DreamWorks. This might be something comparable to Marvel's 2008 Iron Man movie, which changed the way investors viewed the company and helped persuade Disney to spend $4 billion to purchase it.

DreamWorks doesn't appear to have any good contenders for a similarly strong franchise in the works, but that's not saying much. We only know about the company's films through next year, which are Home, Kung Fu Panda 3, and a new title called B.O.O. DreamWorks controls a deep library of properties and characters, and it is the job of its creative team to animate them into new, highly valuable franchises. The team has struggled in that regard in recent years, but the potential for a breakout hit is still there.

Foolish final thoughts

Ultimately, though, investors have placed DreamWorks stock in the penalty box for all the right reasons. The last few years haven't yielded consistent results from its feature films, management's promised cost reductions haven't materialized, and the company's diversification strategy has yet to bear fruit. That's why I wouldn't bet on a real recovery for the stock, at least until DreamWorks reestablishes a track record of consistent success at the box office.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: Netflix isn't one of them. 


Demitrios Kalogeropoulos owns shares of Netflix and Walt Disney. The Motley Fool recommends DreamWorks Animation, Netflix, and Walt Disney. The Motley Fool owns shares of Netflix and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information