Can Dolby's (DLB) Rich Content Pipeline Counter Headwinds?

In the trailing four quarters, Dolby Laboratories, Inc. (NYSE:DLB) has maintained its earnings beat streak on the back of decent top-line growth. Last month, the company delivered impressive third-quarter 2017 results, reporting broad-based growth across all segments. Further, it reiterated its guidance for fiscal 2017.

Analysts are favoring the stock over the last month, as the Zacks Consensus Estimate for fiscal 2017 earnings edged up over the same time frame from $1.97 to $1.99, supported by four upward estimate revisions versus two downward.

Let’s delve deeper into the key growth factors driving the Zacks Rank #3 (Hold) stock in the long term and few deterrents that might restrict its growth in the near term.

The Drivers

Dolby’s long-term growth strategy stands on three pillars, namely advancing the science of sight and sound, providing creative solutions and delivering superior experiences. Successful execution in each of these areas has led to decent growth over the past few quarters. Dolby has maintained its long-standing partnerships with industry frontrunners like Apple Inc. (NASDAQ:AAPL) , Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) to offer best-in-class services and fend off competition.

Impressive market traction of offerings under three of its new businesses – Dolby Voice, Dolby Vision and Dolby Cinema – have proved to be major catalysts. Each of these platforms have a robust pipeline of offerings, which the company believes will boost top-line growth significantly. Coming to Dolby Vision, Disney joined the bandwagon of other major Hollywood studios such as Warner Brothers and Paramount to create Dolby Vision content for home.

Dolby Voice is gearing up for some interesting product launches, in collaboration with its latest partner, BlueJeans. It had launched a partnership with audio conferencing provider, West, to expand this business. Finally, the content pipeline for Dolby Cinema continues to grow at an accelerated pace, adding to the company’s strength.

The number of Dolby Cinema locations has grown rapidly over the last year, with 105 newly-opened screens compared with about 30 a year ago. Dolby believes that there will be about 120–125 screens by the end of the year. This will take the total count to over 325 Dolby Cinema locations opened or committed around the world.

Factors Weighing Down

Despite meaningful growth drivers, shares of Dolby have lost 3.0% over the past six months, in stark contrast to the industry’s rally of 19.8%. 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.

In the past, retail prices for consumer entertainment products, including sound technologies such as DVD and Blu-ray players, have been revised downward making matters worse for Dolby. Owing to such dismal trend, the company anticipates dismal sales of PCs, DVD, Blu-ray and home theater equipment entering into fiscal 2017.

This apart, the company’s profitability is subject to timing of payments from clients. Dolby fears lower recoveries in broadcast business for fiscal 2017 to offset other growth drivers, thus marring prospects. Moreover, OEMs continually focus on reducing product costs, exerting pressure on the company’s licensing fees. Of late, free and proprietary sound technologies are being increasingly adopted by clients and Dolby apprehends that competitors will soon freely enter this space with other offerings, threatening its market share.

You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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