Shut Your Eyes to DreamWorks

 | Jun 17, 2014 | 9:00 AM EDT
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On Monday, shares of DreamWorks Animation (DWA) tumbled when the company reported poor box-office results for its latest animated movie, How to Train Your Dragon 2. Specifically, over the weekend Dragon 2 grossed only $50 million. Because of the popularity of the first movie, which grossed nearly $500 million worldwide, analysts were expecting at least an $80 million opening weekend for the sequel. Can DreamWorks go higher, or is it just a bad dream?

In the last 18 months, DreamWorks has only had one hit movie and three flops. The company needs a hit -- bad -- which is why investors had high hopes for How to Train Your Dragon 2.

Dragon 2 reportedly cost a $145 million to make -- and, before last weekend, analysts thought the movie could eventually gross as much as $245 million in the U.S. and hit $650 million worldwide. While many analysts are sticking with their estimates (right now), a few are starting to doubt the ultimate box-office take. Dragon 2 opened on a lot more screens than the first film did: 6,150, of which about 1,500 were 3D and IMAX (IMAX) screens.

This isn't the first time DreamWorks shares have been pummeled. Back in May, the company took a $57 million writedown on the theatrical release of Mr. Peabody & Sherman. Because nobody younger than 50 knew who Mr. Peabody was, DreamWorks missed on the March quarter. Revenue rose just 9.4% to $147.2 million.

Feature films make up 75% of the company's revenue, and it's hard to grow revenue on the back of such a fickle, hit-and-miss business as film. As a result, management is working hard to diversify away from film and find new sources of growth. For instance, DreamWorks paid $155 million for Classic Media, a company that owns the rights to the Casper the Friendly Ghost and Lassie brands. Those series could become the basis for an expanded run into the television business.

DreamWorks also spent $33 million to buy AwesomenessTV, a project that plans to bring the Shrek, Puss in Boots and Kung Fu Panda characters to the company's YouTube channel. The channel is aimed at six-to-11-year olds, and it is set to feature a mix of videos and cardboard-cut-out news anchors. The idea is to try out show ideas on YouTube before the company invests more money into the programs. DreamWorks plans a slew of new offerings, including "Richie Rich," "Jimmy Blue Shorts" and "Fifi: Cat Therapist."

Expectations are really high. For 2014, analysts are expecting $797 million in revenue, which works out to 12.8% growth. Next year's sales targets are for more than $1 billion, or a climb of more than 25% from this year's estimates. Analysts are expecting most of the company's revenue to come in during the back half of 2014 and the first quarter of 2015.

Analysts had lofty projections for 2013, too, but those didn't pan out. Last year, DreamWorks only brought in revenue of $707 million. In fact, its top line peaked in 2010at $784 million, after the first Dragons movie was released. In order to buy this stock, you have to believe the company's new initiatives will work out -- and I'm just not willing to do that.

It's just too hard to predict how Dragon 2 will fare over the next few months. Also, has anyone watched AwesomenessTV? The channel only has 1.5 million subscribers. Swedish video blogger PewDiePie has more than 27 million. It is going to be very difficult for DreamWorks to cut through the clutter on the Internet and reach the audience size it envisions. For me, DreamWorks is just too hard to figure out.

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