BUY OR SELL-Will Dolby sustain growth momentum?
By Deepti Govind
BANGALORE, June 15 (Reuters) - Shares of audio technology licensor Dolby Laboratories Inc (DLB.N) have gained 20 percent in the last three months as Microsoft (MSFT.O) firmed up its plans to launch the latest version of its operating system, Windows 7, later this year.
Dolby, which licenses its technology to makers of consumer electronics and personal computers, is expected to benefit from the launch of Windows 7, which will be equipped with Dolby's sound technology.
However, some analysts feel the company's performance will slow down this year from prior-year levels as DVD sales peak and weakness in consumer electronics spending persists.
Should investors buy the stock now or would it be worth a wait?
SHARES SET TO RISE HIGHER
Brigantine Advisors analyst Steven Frankel, who has a "buy" rating on the stock, said all core drivers of Dolby's business have slowed, but he expects a recovery in the near to medium term.
"It is a stock you want to own ahead of the recovery," Frankel said. "Dolby is also in more flavors of Windows 7 than they were in Vista. So that is a potential positive."
Maxim Group's Mark Harding said he is "bullish" on Dolby's stock even at current levels.
In the past one year, San Francisco-based Dolby's shares have traded between a low of $24.50 and a high of $47.10. The average price of the stock over the past 50 days is $37.34.
The company's shares have surged 35 percent over the past six months, outperforming the Dow Jones U.S. Broadcasting & Entertainment Index .DJUSBC, which has risen 16 percent in the same period.
"We will see the stock moving higher over the next few months, and the biggest catalyst is Windows 7," said Piper Jaffray analyst Michael Olson, who rates the stock "buy".
Investors have realized that the slowdown in consumer spending and PC unit shipments has not impacted Dolby as badly as expected, Olson said.
Avondale Partners analyst John Bright, who has a "market perform" rating on the stock, said: "Dolby is looking to become the standard on European TV and set-top boxes as they move towards surround sound."
NEAR-TERM PRESSURES
Collins Stewart analyst John Vinh said investors should sell the stock as the company's revenue growth rate is set to decelerate this year.
Vinh, who has a price target of $29 on the stock, expects Dolby's growth rate to decelerate to 6 percent in 2009, and even further in 2010.
The company's revenue rose 32 percent in 2008 and 23 percent in 2007.
"Expectations about Windows 7 have got ahead of themselves," Vinh said.
Pacific Crest Securities analyst Andy Hargreaves, who recently downgraded Dolby to "sector perform", said: "We believe they are going to lose a significant portion of their third-party licensing software revenue."
The increased functionality and higher cost of Windows 7 might prompt major PC original equipment manufacturers (OEMs) to reduce their use of third-party software, which Dolby provides to the PC industry.
Over 80 percent of the company's revenue comes from licensing out its technology.
"Ultimately they will be able to re-establish greater momentum, but at the moment they've been growing at a tremendous rates in the past several years and it's not as strong a scenario right now," said Barrington Research analyst James Goss, who has a "market perform" rating on Dolby's stock. David Joyce of Miller Tabak & Co, who rates the stock a "hold", said: "There is still some effect from the recession from the past couple quarters that needs to catch up to the stock." (Editing by Deepak Kannan) ((deepti.govind@thomsonreuters.com; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800; Reuters Messaging: deepti.govind.reuters.com@reuters.net))
