Automotive And Electronics Partnerships Will Open New Markets

Key Takeaways

• Dolby's expansion into automotive, with strategic partnerships, suggests significant growth potential in licensing and market penetration.
  
• Rising adoption of Dolby technologies in consumer electronics and content creation indicates strong revenue growth through increased licensing and engagement.
  
• Macroeconomic unpredictability, geopolitical issues, and flat audio tech revenue growth threaten Dolby Laboratories' production, earnings, and revenue predictability.

Catalysts

Engages in the design and manufacture of audio, imaging, accessibility, and other hardware and software solutions primarily for application in the television, broadcast, and live entertainment industries in the United States and internationally.

• Dolby's continued expansion into the automotive sector, including partnerships with over 20 OEMs and the market introduction of cars featuring both Dolby Atmos and Dolby Vision, signifies potential for significant revenue growth from licensing and increased market penetration in the automotive entertainment space.
  
• The broad ecosystem development, including partnerships with key players like Samsung Display and Texas Instruments for incorporation in automotive displays and chipsets, respectively, indicates operational catalysts that could bolster Dolby's revenue through widespread adoption in the automotive industry.
  
• The rising adoption of Dolby Atmos and Dolby Vision in consumer electronics, with new product launches across TVs, PCs, soundbars, and mobile devices, suggests expected growth in licensing revenue from these segments as more partners expand the availability of Dolby-enabled products.
  
• The continued momentum in the creation and availability of Dolby-enabled content, exemplified by its strong presence in Grammy-nominated works and widespread use in the global box office, indicates a growing content ecosystem likely to drive revenue through increased licensing and consumer engagement.
  
• The strategic focus on enhancing Dolby.io's capabilities for real-time interactive digital experiences, particularly in sports and beyond, represents a potential growth driver for revenue and market expansion as demand for low-latency, high-quality audio-video streaming solutions increases.

Dolby Laboratories Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dolby Laboratories's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 20.0% today to 19.7% in 3 years time.
• Analysts expect earnings to reach $292.9 million (and earnings per share of $3.09) by about April 2028, up from $262.7 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 41.7x on those 2028 earnings, up from 26.5x today. This future PE is greater than the current PE for the US Software industry at 29.6x.
• Analysts expect the number of shares outstanding to grow by 0.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.6%, as per the Simply Wall St company report.

Dolby Laboratories Future Earnings Per Share Growth

Risks

• The unpredictability in macroeconomic conditions, such as inflation rates and changes in consumer spending, presents a risk that could negatively influence Dolby Laboratories' revenues and profit margins.
  
• Geopolitical instability and ongoing supply chain challenges may pose significant uncertainties, potentially affecting the company's production capabilities and impacting net earnings.
  
• The expectation for foundational audio technology revenues to be flat suggests limited growth in this key area, which could place pressure on overall revenue growth targets.
  
• A noted decrease in consumer electronics revenue by mid-single digits for the year poses a risk to expected total revenue, potentially affecting the company's earnings outlook.
  
• Timing issues related to recoveries, minimum volume commitments, and true-ups may introduce volatility in quarterly financial performance, impacting revenue predictability and net profit margins.

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 2028, revenues will be $1.5 billion, earnings will come to $292.9 million, and it would be trading on a PE ratio of 41.7x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $72.13, the analyst price target of $100.0 is 27.9% 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.