BURBANK, CA – SEPTEMBER 09: General views of the Dolby Laboratories offices on September 09, 2020 in … [+]
Despite already rising more than 2x from its low in March 2020, at the current price of $98 per share, we believe Dolby Laboratories stock (NYSE: DLB) has further upside potential. Dolby stock has increased from $47 to $98 off the 2020 bottom, more than the S&P which increased by around 70% from its lows. Further, the stock is up just around 35% from the level it was at before the pandemic. However, we believe that Dolby stock could rise more than 10% to levels above its recent high of $102, driven by expectations of strong demand and strong Q1 2021 results despite the pandemic. Our dashboard What Factors Drove 58% Change In Dolby Laboratories Stock Between 2018 And Now? has the underlying numbers behind our thinking.
The stock price rise since 2018-end came due to a 10% rise in revenue from $1.05 billion in FY 2018 to $1.16 billion in FY 2020 (Dolby’s fiscal year ends in September). Further, a 3% drop in the outstanding share count, led to revenue-per-share rising by 13% to $11.55 in 2020 from $10.20 in 2018.
Dolby’s P/S (price-to-sales) multiple dropped from around 6x in 2018 to 5.6x by 2019 end, but has since jumped to 8.5x, riding the rally in technology stocks. We believe that the company’s P/S ratio has the potential to rise further in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.
Where Is The Stock Headed?
The global spread of coronavirus and the resulting lockdowns have led to a drop in demand for medium to large scale sound systems, as theaters have remained closed and large-scale events are not as frequent, due to the pandemic. This has led to a drop in demand for Dolby’s products, which is evident from their Q1 2021 results, where product and services revenue came in at $17 million, half of that in Q1 2020. However, with gaming console and home entertainment system sales rising, licensing revenue jumped 1.5x from $257 million to $373 million over this period. This led to total revenue rising from $291 million to $390 million. With licensing making up the bulk of revenue, COGS and operating expenses came in low, leading to operating margins jumping from 16.7% to a strong 42.2%. This helped drive EPS from $0.49 to $1.34 over this period.
We expect licensing revenue to stay strong in the medium term, and with the lockdowns being lifted and theaters re-opening, we believe the company will see a revival in products and services revenue as well. These factors will raise investor expectations further, driving up the company’s P/S multiple. We believe that Dolby Laboratories stock can rise more than 10% from current levels, to new highs over $102.
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