There are many companies looking forward to the next 365-day period, but DreamWorks Animation
Challenges in the year ahead
DreamWorks Animation is not alone. No doubt Katzenberg wishes he had a monopoly over computer cartoons in the same way that Microsoft holds a monopoly over operating systems. But he doesn't, and he will have to contend with intense competition. Every studio out there -- like Disney
This is a really big issue. DreamWorks Animation has to imbue its releases with the most powerful storytelling engine possible, but if it can't deliver an opening weekend bigger than the last picture it released in a comparable timeframe, then all is lost. Well, that might be a bit of an exaggeration, but the pressure will be on the studio come next summer, because it will be up against Pixar's next project, Ratatouille. It's difficult to say exactly how that film will fare, but we all know that audiences are primed almost like Pavlov's dogs to hand over discretionary dollars at the ticket window in exchange for the right to view a Pixar property. That's okay, though, because DreamWorks Animation has a pretty impressive ace up its corporate sleeve.
A Shrek of a franchise
I confess -- I've never seen any of the Shrek films, and I don't really feel a compulsive need to go out and rent them. But I do know that Shrek is a mammoth franchise for DreamWorks Animation. It has brought in huge business for the company since its debut in 2001. According to Boxofficemojo.com, the first feature in the series grossed $42 million in its opening weekend at the domestic box office and eventually took in $484 million from theaters around the globe. The second film grossed over $100 million in its opening weekend and wound up with a worldwide cumulative gross of $921 million.
Ratatouille will certainly have its work cut out for it if it wants to effectively compete with Shrek the Third next summer. Those numbers in the previous paragraph are rather daunting if you ask me -- they are especially daunting when you consider that Pixar's last project, Cars, while a nice success in some respects, didn't pull the kind of grosses that some might have expected. In fact, Cars performed quite weakly when stacked up against past Pixar hits such as The Incredibles and Finding Nemo -- those two grossed on a worldwide basis $631 million and $865 million, respectively. Cars revved up $462 million globally.
What's the point of this, you ask? After all, does the past box office dynamic of Cars tell us anything about the potential of Ratatouille? Not necessarily. But it does show that DreamWorks Animation might be poised for a very strong outing this summer -- Pixar is putting out an original property as opposed to a sequel in a very hot franchise, and its last three flicks define a declining trend in worldwide box-office grosses. It's impossible to predict what the box office will do at this early point, but looking at those numbers, I'd say shareholders of DreamWorks Animation should be excited.
Another superhero stock
Ever hear of Marvel Entertainment
Instead, an investor might think of the upcoming catalysts for these stocks. Knowing that DreamWorks Animation might have a banner year in 2007, I'd hope that some of you might have considered the stock an active idea on your watch list when the stock hit its 52-week low of about $20 a stub -- in fact, Rick Munarriz couldn't believe that it was so low at the time.
Even if you didn't, one might suppose that DreamWorks Animation stands a great chance of going higher from here, since Shrek and his fairy-tale shenanigans will be a significant driver of the company's performance. And I am hoping that 2007 will show that Katzenberg has learned from the past mistakes regarding Shrek 2's video release. It's probably infamous by now, but DreamWorks Animation ended up seeing so many unsold videos returned from retailers that profits were significantly affected. I wouldn't necessarily swear off the stock in 2007 because of this past issue with the Shrek franchise, but it is something to keep in mind. Another point to keep in mind is the fact that revenues from the third Shrek won't necessarily flow to the company coffers right away. A look at the latest 10-K shows that, when Shrek 2 was released in 2004, the costs associated with its distribution exceeded the revenues generated at the time. It would be a while before monies from the film were able to be booked. Nevertheless, Wall Street institutions are forward-looking beasts, so it might be best to have a look at the stock and be ahead of the curve.
Will it be a dreamy year?
I think 2007 will be a good year for DreamWorks Animation. Shrek the Third will make a ton of money, and I believe that the company will manage the home-video release -- presumably during the holiday season -- with a smarter hand this time around. Nothing is guaranteed in Hollywood, but I have a feeling that the next year will be a fairy tale for the cartoon studio and its investors.
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Fool contributor Steven Mallas owns shares of Disney and Marvel Entertainment. As of this writing, he was ranked 5,387 out of 17,523 investors in the CAPS system. Don't know what CAPS is? Check it out . Microsoft is an Inside Value pick. The Fool has adisclosure policy.