The New Frontier is Real
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As a Dolby Laboratories (NYSE: DLB) investor and blogger who covers the company you can imagine my delight when I received an e-mail from their investor relations department that says their Dolby Digital Plus technology is going to be included in the new Kindle Fire HD from Amazon (NASDAQ: AMZN). In Dolby’s last form 10-Q they talked about how they were looking to the future by developing audio technologies for tablets and smart phones. Up until the Sept. 6 announcement, I thought Dolby was putting all of their eggs in one basket with Microsoft’s (NASDAQ: MSFT) Windows 8 and creating a coin toss that depends on the success and failure of that one product. The Amazon announcement cemented in my mind that the new frontier of sound technology (at least for smart tablets) is real.
In a previous article I highlighted several concerns about Dolby’s prospects. One concern was that the devices that typically house Dolby technology such as Blu-Ray players, DVD players and PCs were becoming obsolete. I also highlighted concerns regarding Dolby’s difficulty in their products division such as being able to incorporate their technologies into digital movie cameras. Dolby’s latest form 10-Q reaffirmed those concerns when revenue and free cash flow declined 1% for nine months ending June 29. What gave me faith in the company was the extraordinary cash to stockholder’s equity of 57% as of the most recent quarter, the fact that it is trading at a really low valuation, and that they added a licensing deal with Microsoft to incorporate Dolby’s technology into their new Windows 8 devices.
Dolby’s exclusive deal with Microsoft was the only evidence of Dolby’s expansion into the mobile and smart phone frontier. This was one of the few positive “coin tosses” that I saw. The low valuation and excellent fundamentals prompted me to invest in this company; however, I was concerned that the future of this company depended a whole lot on the success or failure of one product. I was putting faith that Dolby would be able to partner with other companies. The Kindle Fire HD announcement proved my faith was not misplaced.
Amazon is infinitely looking for ways to please the customer and built the Kindle HD with dual speakers for better sound. They compared it to Apple’s (NASDAQ: AAPL) iPad, but the iPad only has one speaker. This tells me that Amazon only wants to use the best for their new speaker system for the Kindle HD and is once more ready to take on Apple and others in competing for the tablet market.
The popularity of the original Kindle should bode well for Dolby’s involvement with the HD version and Dolby will be in even better shape if Microsoft’s Windows 8 also takes off. The original Kindle Tablet has roughly 22% of the market share. My biggest concern here is that the Kindle HD will nudge out the Windows 8 tablets thus canceling out any gain for Dolby. I suppose if the popularity of the Kindle HD is far reaching enough it won’t matter. This also demonstrates that Dolby is hedging its bets. Hopefully Amazon will use Dolby technology in future devices such as cell phones and future generation tablet devices. Who knows, maybe other manufacturers will also adopt Dolby Technologies.
With Dolby’s excellent fundamentals, low valuation and the fact that they are incorporating technologies into devices other than Windows 8 based tablets reaffirms my faith in Dolby Laboratories as a long-term investment. If other tablet and smart phone manufacturers see how Dolby’s sound quality could enhance their customers’ experience, then maybe Dolby has a future as a renewed growth company. I am convinced that the new frontier of audio technologies for tablets and smart phones is real.
stockdissector has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, and Dolby Laboratories. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.