(FORTUNE Magazine) – In last year's hit movie Finding Nemo, the titular tiny clown fish chafed against his overprotective father and asserted his independence by swimming out to sea on his own. You might say that Pixar Animation Studios (PIXR, $68), Nemo's creator, is doing that very same thing. In late January, Pixar CEO Steve Jobs ended discussions with Disney to extend a successful co-production agreement in which the Mouse House markets and distributes Pixar's highly profitable movies.

So now that the darling of digital animation is headed out on its own, should investors bet that the tiny company (2003 revenues: $263 million) can swim on to continued success? There are reasons to be wary. Nemo-mania and takeover rumors have helped double Pixar's stock over the past two years, meaning it now trades at a premium P/E of 32. And because Pixar is such a young company with a library of just five films, its financial health is dependent on each new release in a way that other media companies aren't. That could make the stock volatile.

But Pixar is spectacularly profitable. The studio earned profits of $125 million for 2003, giving it a profit margin of 48%. And with each successful film, Pixar becomes more and more stable. After a movie is produced, there's little incremental expense, and increasingly Pixar can sit back and collect cash from DVD sales and merchandising. "Making an animated movie is very different from making a live movie," says Merrill Lynch analyst Andrew Slabin. "It has a longer shelf life and resonates more with families." Indeed, sales of Pixar's older movies like Toy Story and Monsters, Inc. add up to 20% of revenues now, and that's expected to rise to 60% by 2007. Pixar also has no debt and some $500 million in cash. Slabin says that Pixar's ability to establish its brand with the public in such a short time is a major strength. "It's like investing in Disney's animated business in the 1930s," he says. "This is all they do, and they do it well."

Pixar has two movies left--The Incredibles, due out in November and already getting plenty of advance buzz, and Cars, slated for 2005--before it completes its seven-film contract with Disney. Meanwhile, the studio is shopping for a new distribution deal with a partner, such as Sony or Warner Bros., willing to give it a much bigger cut of the box office than its current 50/50 arrangement with Disney. That means, assuming the makers of Nemo don't lose their golden touch creatively, profits could surge even higher in 2007. --Christine Y. Chen