Shrek Wreck at DreamWorks

The weak quarter puts more pressure on the studio's next release, Madagascar, to do well at the box office when it opens May 27, ahead of Memorial Day weekend. It will also lead to further questions on the animation business in general and how many cartoons audiences can bear. Shares of Pixar (PIXR Quote - Cramer on PIXR - Stock Picks) slipped 2% late Tuesday even though the company posted blowout numbers last week.

But at least one industry observer called questions about the broader animated-movie market overblown.

Paul Dergarabedian, president of box-office tracking firm Exhibitor Relations in Los Angeles, said, "When a movie has a very strong theatrical release, there's usually a ripple effect for DVD sales." He noted that while his company doesn't track DVD sales, "There are not enough adjectives to describe the success of Shrek 2 at the box office."

At $108.2 million, Shrek 2 last year had the second highest opening weekend of all time, second only to Spiderman 2. Asked if the DVD market was oversaturated with animated product, he said that in general, parents really never have enough family fare.

That said, DreamWorks slashed 2005 earnings guidance to $1-$1.25 a share. Wall Street was expecting $1.88.

The news came at the end of a trading day that saw the stock plunge 5% in heavy volume after Newsweek reported the company would post weak numbers.

The news couldn't come at a worse time for early investors like Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) co-founder Paul Allen, who hoped to recoup his investment in the company thorugh a planned secondary offering. The deal was to follow the release of Madagascar.

On the upside, Shark Tale generated $142 million of revenue in the quarter from international theatrical and worldwide home video. To date, the film's worldwide theatrical revenue has surpassed $365 million.