Buy Digital Domain Now And Wait For It To Double In 2013

| About: Digital Domain (DDMGQ)

Digital Domain Media Group (DDMG) beat analysts' estimates for revenue, net income and earnings per share. The company's first quarter beat was not enough to send investors moving on from the company behind the Tupac hologram.

Digital Domain reported revenue of $31.1 million for the quarter, besting analysts' estimated $26.5 million. Earnings per share were reported as a loss of $0.37, which fared better than a loss of $0.40 that analysts had been targeting. Digital Domain reported negative net income of $14.8 million. The loss was smaller than the loss of $17.1 million predicted by analysts prior to the company's first quarter.

Many highlights took place for Digital Domain during the first quarter:

  • Opened Tradition Studios in Florida, the new animation segment of the company.
  • Began classroom instruction at the Digital Domain Institute, in partnership with Florida State University.
  • Launched Virtual Performer business after the success of the Tupac hologram. The company reported they have received numerous requests based on the late rapper's image.
  • Signed a deal to create a new studio and virtual effects university in Abu Dhabi.
  • Signed a partnership to distribute The Legend of Tembo in China.

The company's revenue backlog stands at $100.3 million (as of 05/14). This represents a 40% increase from this time last year in the company's backlog. The company also stands to recognize more in grant money from its building of the Tradition Studios and the Digital Domain Institute. While the costs of these were paid up front on the company's earnings report, the grants from the state of Florida and others will be earned over time.

Ender's Game remains one of the brightest prospects for the company. Digital Domain is attempting to branch away from the virtual effects for hire and make movies on its own. The movie, based on a bestselling book by Orson Scott Card, will be released November 1st, 2013.

I highlighted the future film in an article (article here) about Lions Gate Films (LGF) which along with Odd Lot Entertainment owns the rights to the movie. The movie was originally scheduled to be released in March, but was pushed back to allow more time for filming. While this may seem like a big negative, it could actually turn into a positive news piece for the company. The movie will now be part of the holiday blockbuster movie season. Lions Gate has also committed to advertising for the movie along with Catching Fire, the highly anticipated sequel to The Hunger Games. Lions Gate's decision to advertise for both blockbuster movies together benefits Digital Domain. Digital Domain can help make the special effects in the movie, but does not have other movies to advertise the new movie with. The movie has a $100 million budget and should easily make $100 million in its first three weeks of release.

I first highlighted ("Tupac Hologram Brings Digital Domain Back Into Spotlight") Digital Domain Media Group after its successful assistance in creating a hologram of the legendary rapper Tupac Shakur at the Coachella Festival. I have even gone on to argue about bands possibly resurrecting for tours with deceased band members being portrayed by holograms (See article here). R&B group TLC will be hitting the road with a hologram image of deceased band member Lisa "Left Eye" Lopes. The Tupac hologram's success and hype led Digital Domain to create its Virtual Performer Business segment.

Digital Domain shares are not for the faint of heart. Since the Tupac hologram, shares of the company have had double digit percentage moves on a daily and weekly basis. I have owned shares of the company since the first week after the buzz surrounding the hologram. I had the opportunity to sell my shares for a handsome profit, but decided to hold on to them for the bigger long term picture. Bears will continue to comment on my posts and write new articles about the company's huge debt load and net losses over the year.

I won't deny the company has a huge debt load or the fact that it has reported losses over the years. The new animation studios, virtual performers, and co-owned Ender's Game movie franchise make the stock one to watch. Acquire shares now and see the rewards in 2013 or 2014. I stand behind my $14 price target, but extend the targeted range until November 2013 based on the delayed release of Ender's Game.

Disclosure: I am long LGF, DDMG.

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