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Why DreamWorks Animation Still Has Room for Growth

January 08, 2014 | About:
Victor Selva

Victor Selva

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The animated film industry is a market segment that has blossomed over the past 20 years, and DreamWorks Animation SKG Inc. (DWA) has been at the head of this evolution. The family entertainment company specializes in creating animated feature films, television series and related consumer products for a global audience. With a total of 25 released animated films, this firm has established itself as a dominant industry leader with a broad and supportive fan base. However, looking forward, the company will have to diversify its revenue income in order to keep growing.

In Between Worlds

Up until 2012, DreamWorks owed most of its cash flow and profits to the film business, a segment in which the firm excelled on more than one occasion. With box-office hits like “Shrek” and “Madagascar,” the company not only earned over $3 billion in revenues, but also laid the groundwork for a profitable franchise business. This second revenue stream, comprised of home-videos, merchandising and television series, has helped expand the initial commercial success of the animated films in the long term. Given that DreamWorks only generates five feature films every two years, this franchising strategy has cushioned some of the high scrutiny placed on each film.

Furthermore, due to the movie industry’s transition in sight of slow DVD sales, this company is refocusing its business strategy towards television. As such, in 2012 Class Media was acquired in order to create more television content, based on the mythical characters of the animated hit films. Although the acquisition raised DreamWorks debt well beyond its cash income, the investment is expected to lead to a $200 million annual revenue boost by 2015, doubling the firm’s 2013 income, according to management. Additionally, the company recently signed a licensing agreement with Netflix Inc. (NFLX), which will grant yet another steady revenue stream for television content creation. The deal is set to air 1,200 animated television episodes over the next five years, based on DreamWorks’ most lovable characters, and will comply with the current high demand for quality children’s programming.

Of Risks and Further Developments

Despite this positive trend, not all is sunny in the animated film business, especially when it comes to its most popular player. Given the company’s current dependency on movie profits, the limited release schedule could cause some issues. In the case of a box-office flop, which is difficult to foresee, the firm could lose significant annual earnings, and cash flow could be stomped. Also, the scrutiny placed on each film can easily lead to fluctuations in the company’s stock price, causing investors to shy away. And not to forget, piracy and shifting consumer preferences are a serious threat when it comes to DVD sales, one of the major income sources of all movie studios.

Nevertheless, CEO Jeffrey Katzenberg is set on his company’s expansion and has left no stone unturned. This January DreamWorks will be presenting its first tablet computer designed for children, by the hand of Nabi tablet creator Fuhu. The DreamTab, which combines educational applications with the animated film characters, will not only add further revenue income to the firm, but also pave the road for further developments in the technology segment. Moreover, the product launch and licensing agreements seem to have driven the company’s stock price upwards over the past year, boosting it from $16.65 to $34.9 as of January 2014. Despite the company’s downward metric trend in 2012, I feel bullish about DreamWorks diversification strategy and see strong potential for further growth in the long term. And investment gurus Ron Baron (Trades, Portfolio) and Ray Dalio (Trades, Portfolio) also seem to  have faith in the animated future, as they recently acquired large quantities of DreamWorks shares.   

Disclosure: Victor Selva holds no position in any stocks mentioned.    

 


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