Acquisition Of THEO And Automotive Partnerships Will Strengthen Future Audio Offerings

Key Takeaways

• The expansion of Dolby Atmos and Dolby Vision across multiple sectors suggests promising growth and diversified revenue streams.
  
• The acquisition of THEO and new licensing deals are poised to enhance offerings and improve earnings and margins.
  
• Economic challenges and revenue volatility threaten growth and earnings, with foundational technology declines and integration risks from the GE licensing acquisition affecting margins and predictability.

Catalysts

Dolby Laboratories, Inc. creates audio and imaging technologies that transform entertainment at the cinema, DTV transmissions and devices, mobile devices, OTT video and music services, home entertainment devices, and automobiles.

• The adoption and expansion of Dolby Atmos and Dolby Vision across various segments such as music, sports, automotive, and TVs indicate growth potential, likely leading to increased revenue streams.
  
• The acquisition of THEO is expected to strengthen Dolby.io's offerings, enhance revenue possibilities in interactive sports and entertainment content, and support overall earnings growth.
  
• Momentum in the automotive sector with over 20 OEM partners for Dolby Atmos, including recent signings, suggests potential for revenue growth in high-margin automotive audio solutions.
  
• Expansion into mid-range and affordable TV segments with Dolby technologies is anticipated to broaden market reach and drive revenue growth from consumer electronics.
  
• The GE licensing deal is expected to add significant revenue and improve margins, contributing positively to non-GAAP operating margins and overall earnings growth.

Dolby Laboratories Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dolby Laboratories's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.6% today to 21.6% in 3 years time.
• Analysts expect earnings to reach $328.7 million (and earnings per share of $3.4) by about December 2027, up from $261.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.7x on those 2027 earnings, up from 28.6x today. This future PE is lower than the current PE for the US Software industry at 42.0x.
• Analysts expect the number of shares outstanding to grow by 0.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Dolby Laboratories Future Earnings Per Share Growth

Risks

• The downturn in Global Consumer Electronics sales and underperformance at the box office were persistent issues during the year, which could potentially affect revenue growth in the future.
  
• Foundational audio technology revenue has been declining and is expected to stabilize rather than grow, which may put pressure on net margins if cost reductions cannot be aligned with flat revenue projections.
  
• Licensing revenue volatility due to factors like minimum volume commitments and true-ups might create unpredictability, impacting earnings reliability.
  
• Economic conditions, including possible fluctuations from tariff changes, could affect consumer behavior and overall device sales, likely impacting revenue from foundational technologies.
  
• The GE licensing acquisition presents integration risks, and amortization of related intangibles will affect GAAP earnings by reducing net earnings.

Valuation

• The analysts have a consensus price target of $100.0 for Dolby Laboratories based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.5 billion, earnings will come to $328.7 million, and it would be trading on a PE ratio of 35.7x, assuming you use a discount rate of 7.0%.
• Given the current share price of $78.47, the analyst's price target of $100.0 is 21.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.