Pricing strength in consumer electronics have been non-existent for as long as I can remember, so I would dare not touch any such manufacturers. Besides, it's hard to invent a cool new thing and then manufacture it at a price point that's attractive to consumers. All these means ugly margins, inconsistent returns on invested capital, and virtual no free cash flow. All told, these companies lack any competitive advantages.
But there's got to be a way to play the growth in plasma TVs, Hi-Def DVD players, X-Box's and PS3's. Dolby Labs is the ticket. They develop audio and surround sound technologies and then licenses it out to consumer electronics manufacturers (about 75% of revenue). They incur licensing fees per unit volume, not per dollar amount of these consumer electronics that get sold.
They got one competitor in DTS (DTSI). But unlike other oligopolies (such as Netflix vs Blockbuster or Sirius vs XM), it's not one or the other. They can co-exist because any given movie or game title can contain soundtracks encoded in both formats. In DVDs, Dolby Digital was the de-facto standard, and DTS was more or less optional, so adoption of DTS was very low among movie studios. With Hi definition DVD players, movie studio are more likely to adopt both standards (Dolby True-HD and DTS HD). But this unlikely to impact Dolby Labs, because I think DTS soundtracks would always be considered an optional one provided in addition to the Dolby soundtrack. Looking at their past numbers, DTS has been less profitable and less capable of providing attractive returns on invested capital. This may change, but it's not be taking market share from Dolby.
Corporate governance isn't that great at Dolby because Ray Dolby, the founder, controls 92% of the voting power through super-voting class B shares. I'll be watching this one closely.
Dolby reported a great quarter and the stock went up about 14%. It has gotten back down to where it was before and it looks like an opportune moment to snap up some shares.
$34.59 (08/23/07)
Agree
Disagree
