Dreamworks: Another Google?

11/26/2004 12:00 am EST

Focus:

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Despite its IPO being scorned by Wall Street, Bernie Schaeffer was bullish on Google and correctly anticipated future analyst upgrades. Now, looking at the recent IPO of DreamWorks, he asks, "Could we have another Google in the making?" Here's his reasoning.

"The bears have been growling at DreamWorks Animation (DWA NYSE) since its IPO on October 28. But we've heard this song and dance before. Long before Google (GOOG NASDAQ) took its first official step on Wall Street in August, the financial media was ripping into the Internet search engine on a regular basis. Even after the stock made a stellar debut, the bashing continued among the gurus. Meanwhile, the press hasn't exactly been tripping over itself to back DreamWorks, which went through the usual channels to release its IPO (unlike GOOG and its Dutch auction). In fact, an article in a daily newspaper following DWA's release was quick to point out the risks surrounding the stock despite its stellar launch.

"From a fundamental perspective, DWA remains an enticing issue. In May, the animation company released the wildly popular Shrek 2 to theaters. DreamWorks reported that this film was the third-highest grossing film of all time in the domestic box office and enjoyed the largest domestic gross among all animated pictures. Furthermore, this film generated an estimated $185 million in retail revenue during the first three days of video and DVD release. Meanwhile, DWA's newest release-- Shark Tale --grossed $123 million during the first three weeks of October. If the company can keep this hit train on track, strong earnings will continue to roll in for the firm, much like its rival Pixar Animation Studios.

"Technically speaking, DWA started off strong. The equity's IPO priced above its original range of $23-25 at $28 per share. What's more, the equity soared another 38% on its first day of trading and still sits more than 40% above its IPO price. Following the stock's first day of trading, the shares pulled back to a low of $35.60 on November 2. Shortly thereafter, I initiated a long position on DWA in my Master Portfolio, fully expecting the shares to continue their rally as pessimism unwinds in the form of increased buying pressure.

"While skepticism isn't as rampant toward DWA as it was toward Wall Street outcast GOOG, brokerage firms and investors have yet to welcome the animation company with open arms. Both Zacks and Yahoo! Finance have yet to pick up any brokerage firm ratings for Dream Works. Like our forecast with Google, this is something to keep a close eye on. A little more than a month after GOOG's IPO, at least five brokerage firms initiated coverage of the stock. Continued fundamental and technical strength in DreamWorks could definitely draw the attention of Wall Street, bringing in a potential deluge of analyst rankings. Like GOOG, DreamWorks could become a stock that fund managers cannot afford not to own, and sentiment that moves from pessimism to acceptance could drive DWA to ‘dreamy’ levels similar to what we had previously seen with Google."

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