Can Dolby Continue To Ride On Dolby Cinema's Strength?

On Aug 23, we issued an updated research report on Dolby Laboratories, Inc. (NYSE:DLB) .

San Francisco-based company Dolby Laboratories, Inc. specializes in audio-noise reduction and audio encoding/compression. Dolby has a massive scale of operations, with its technology being deployed by premium electronics makers across a wide spectrum including TVs, PCs, tablets, DVD/Blu-ray players, operating systems and set-top boxes.

The company is presently focusing on bolstering its leadership position in audio solutions and introducing new audiovisual experiences to the market in order to grab a greater market share. Dolby Audio has established itself as a staple component for technology frontrunners like Apple Inc. (NASDAQ:AAPL) , Netflix, Inc. (NASDAQ:NFLX) , Amazon.com, Inc. (NASDAQ:AMZN) and ITV (LON:ITV). In this regard, Dolby Audio’s recent addition in Apple’s latest iOS version 9.3 and Google (NASDAQ:GOOGL) Play looks promising.

Dolby Atmos – the latest audio format from Dolby – is gaining exceptional traction and is being adopted beyond the cinema into AVRs, sound bars, speakers, smartphones, tablets and set-top boxes. Post the success of Yamaha Dolby Atmos Sound Bar, the company believes the upcoming release of Dolby Atmos sound bar from Samsung (KS:005930) holds bright prospects.

Moreover, the company’s three impressive projects, namely – Dolby Voice, Dolby Vision and Dolby Cinema – are likely to accelerate growth. Dolby Vision’s growth is being fueled by elevated adoption in world’s premium TV manufacturing companies like LG and VIZIO.

Also, increased streaming by entertainment content providers like Netflix, Vudu and Amazon is adding to the growth momentum of Dolby. Similarly, Dolby Voice’s increased adoption in China and ability to clinch deals with growing companies like Highfive is proving conducive to the company’s growth.

Out of the three new projects, we are particularly bullish about the prospects of Dolby Cinema. This offering has been gaining phenomenal success since its launch and holds the brightest future shines. Presently, there are just over 30 Dolby Cinema locations but Dolby’s partners are planning to roll out a total of over 220 locations around the world, reflecting tremendous growth prospects. During third-quarter 2016, Dolby’s partners including Wanda and Jackie Chan Cinema opened their first Dolby Cinema’s and have ambitious expansion plans for the long time.

Ever since the launch of Dolby Cinema in May 2015, over 50 Dolby Vision theatrical titles have been announced or released and majority of studios have released theatrical content optimized for Dolby Cinema. The company believes that surging demand for premium viewing experiences will propel growth for Dolby Cinema over the long haul.

Despite these positives, the company’s cinema product sales are subject to fluctuations which have the potential to thwart growth significantly. The cinema sales are based on general conditions in the industry, such as the construction of new screens or up gradation of existing screens. Though the company’s relatively new offering Dolby Cinema is experiencing exceptional market traction, there is no denying the fact that its success is hitched to the pipeline and the performance of motion pictures at Dolby Cinema locations.

Moreover, given that the transition to digital cinema is almost complete, demand for new digital cinema screens is slowing down, which in turn is impeding cinema product sales. Maturity of the digital cinema market also exposes the company to a host of risks including pricing competition and development of cheaper products by competitors. Also, retail prices for consumer entertainment products, like sound technologies such as DVD and Blu-ray players are subject to price fluctuations, are adding to the company’s concerns.

In addition, the market for consumer entertainment products is highly competitive and price sensitive which exposes Dolby to the risks of reduced revenues owing to lower prices. Also, the company’s profitability is subject to timing of payments from clients. This Zacks Rank #3 (Hold) company expects profitability to reduce in the fourth quarter due to unfavorable timings of payment after a robust third quarter.