In mid-July, DreamWorks Animation (NYSE:DWA) updated its earnings guidance from "no profit" to a loss of $0.07 to $0.09 a share. And sure enough, last night the company reported second-quarter results that showed a $0.06 a share loss (after factoring out a $2 million one-time tax benefit).

The stock was up 5% in noontime trading Friday, even though the company stuck with its recently lowered 2005 earnings estimate of $0.80 to $0.90 a share, pricing the company's shares at 28 to 31.6 times this year's estimated earnings.

It has been less than a year since the company's IPO at $28 a share. The stock is down slightly to $25.28 a share. But look at a chart and notice the stock was $42.60 in early December. Yikes! What were investors dreaming about that caused the May swoon in the stock price?

Fueling those early dreams was the phenomenal $1.3 billion combined box office success of Shrek2 and Shark Tale (and expectations regarding associated DVD sales). Shrek2, with a worldwide gross of $920.7 million, is the sixth-largest grossing movie of all time and the largest-grossing animated movie ever. For comparison, competitor Pixar's (NASDAQ:PIXR) top movie, Finding Nemo, is No. 10 all time, with an $864.6 million take.

That movie success was magic pixie dust that led to earnings of $3.26 a share last year. Obviously, earnings of even $0.90 -- the high end of guidance -- are hardly dreamy results on a comparative basis. Oh, and don't look at analysts' estimates for 2006. Their crystal balls are showing another down year, with $0.66 a share as their average estimate.

Guessing how much movies will make is certainly an art that, so far, no person has perfected. The upcoming Wallace & Gromit clay-animated film, featuring the cheese-loving Wallace and the faithful canine Gromit, should be particularly well-received in foreign markets. But will it be box office gold? That's not expected.

The gold standard for DreamWorks Animation is Shrek. The next installment of that franchise is due in May 2007, which is when the earnings estimates should really get interesting again.

Look at it this way. Marvel (NYSE:MVL) has Spider-Man, MGM has James Bond, and fellow Motley Fool Stock Advisor recommendation Time Warner's (NYSE TWX) Warner Brother's unit has Harry Potter. These franchises are rare, but, oh, are they dreamily lucrative.

DreamWorks has taken a big fall. It may slide still more as investors look at the earnings prospects for this year and 2006. But when Shrek3 comes to town, the dream of cash riches will once again be the talk of the investment community. All said, it's my opinion that DreamWorks stock currently prices at something of premium (on a forward multiple basis), no doubt in part based upon Shrek2's hefty delivery. The question investors need to ask is whether Shrek3 or anything else can deliver on such a scale as to justify the current valuation.

Fool contributor W.D. Crotty owns shares in Marvel. Click here to see The Motley Fool's disclosure policy.