Dolby Laboratories: Picture Improved, But Still A Bit Too Expensive

seekingalpha11-22

Dolby Laboratories reported strong Q4 and FY 2024 results, with significant improvements in revenue, operating income, and free cash flow, boosting the stock by over 15%.Management highlights growth ...

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(NYSE:DLB) reported its fourth quarter and full-year results for fiscal 2024. The stock, which was rather struggling in the last few years jumped more than 15% following the last results. My last article was published in mid-May 2024 and back then I rated the stock as a \"Hold\". After declining in the last few months, the stock is now trading for the same price as back then. The question now is if the picture improved so much that a higher intrinsic value is justified, and we can see the stock as a \"Buy\" or if it is still a \"Hold\". Quarterly Results Considering that Dolby Laboratories was rather struggling in the last few years, fourth-quarter results were quite solid. The company reported the highest top-line growth rates in the last six quarters. Revenue increased from $290.6 million in Q4/23 to $304.8 million in Q4/24 - resulting in 4.9% year-over-year top-line growth. Operating income switched from a loss of $3.5 million in the same quarter last year to $46.4 million in this quarter. Diluted earnings per share increased from $0.09 in Q4/23 to $0.61 in Q4/24 - resulting in 578% growth (but that might not be a reasonable metric at that point). Dolby Laboratories Q4/24 Earnings Release On a non-GAAP basis, earnings per share increased 24.6% year-over-year from $0.65 in the same quarter last year to $0.81 in this quarter. Finally, free cash flow increased from $76.8 million in Q4/23 to $108.8 million in Q4/24 - resulting in 41.7% year-over-year growth. Dolby Laboratories Q4/24 Earnings Release When looking at revenue, $22.1 million stemmed from \"Products and Services\" and year-over-year revenue declined 13.0%. Licensing revenue on the other hand increased 6.6% year-over-year to $282.7 million. And we can look at the licensing revenue in more detail. While revenue from \"Broadcast\" declined 6.4% year-over-year to $95.8 million, the other four were able to increase revenue. Consumer Electronics increased revenue only slightly (0.7% YoY growth) to $42.0 million, but especially \"Mobile\" increased revenue 34.9% year-over-year to $48.7 million and revenue from PC increased 25.4% year-over-year to $34.1 million. Finally, revenue from \"Other\" increased 7.6% year-over-year to $62.1 million. Returning on the Path of Growth? When talking about growth for the near-term future, management mentioned several growth opportunities during the last earnings call: We're excited about the growth opportunities going forward. We're seeing good momentum for Dolby Atmos and Dolby Vision. The GE Licensing business gives us a stronger position in imaging patents and we expect the THEO acquisition to accelerate our emerging Dolby IO business. Especially for the licensing revenue from music, Dolby Laboratories is seeing promising trends that might continue in the coming quarters: Turning to music. The momentum continues to build with over 1,200 studios globally equipped with Dolby Atmos capabilities and over 90% of Billboard's global Top 100 artists having released music in Dolby Atmos. Music is a big driver for multiple device categories and is the number one driver for Dolby Atmos adoption on automotive. Although some other licensing revenue streams - like box office or consumer electronics - might continue to struggle, management is expecting revenue for the full-year fiscal 2025 to be in the range of $1.33 billion to $1.39 billion. Compared to a revenue of $1,274 million in fiscal 2024, this results in a top-line growth of about 4.5% to 9.0%. And management is expecting non-GAAP earnings per share to be in a range of $3.99 to $4.14, which would result in about 5% to 9% year-over-year bottom-line growth. The guidance is also implying an operating margin expansion of roughly 2 percentage points. During the last earnings call, management provided more on the guidance and what to expect for the different sources of licensing revenue:  The GE Licensing deal is expected to contribute roughly $55 million to total revenue and be accretive to non-GAAP operating margins and earnings. We expect revenue from foundational audio technology to be roughly flat, consistent with the market expectation for overall device shipments. Revenue from Dolby Atmos, Dolby Vision, and imaging patents should see roughly 15% growth in fiscal year '25. Dolby Atmos and Dolby Vision is expected to grow roughly 15% organically and imaging patents is expected to grow roughly 15% as the acquired revenue from GE Licensing is partially offset by the tough comp in imaging patents. From an end market perspective, we expect consumer electronics to be down mid-single digits and broadcasting PC to be flattish. We expect mid-teens growth in mobile, driven by the GE Licensing acquisition and recoveries at mid-teens growth and other on strength in Auto and Dolby Cinema.  And while management is only providing a guidance for the next fiscal year, analysts are offering estimates for earnings per share at least for the next few years. Between fiscal 2024 and fiscal 2027, analysts are on average expecting Dolby Laboratories to grow its bottom line with a CAGR of 8.79%. The question is also where growth should stem from. One of the problems Dolby Laboratories had in the last decade - and which led to rather stagnating sales - is a more or less saturated market. But there seem to be at least a few ways to grow revenue in the years to come. One growth opportunity seems to be the automotive sector. At the beginning of 2020, Dolby Laboratories had 10 OEM partners for Dolby Atmos, and during the last fiscal year, the number more than doubled to above 20 partners now. In the fourth quarter, Dolby Laboratories signed up two more partners - Wey, a Chinese car company and Smart, a joint venture between Mercedes and Geely. Another way to grow is by acquisitions. In June 2024, Dolby Laboratories announced it will acquire GE Licensing, a leading innovator with world-class patents and licensing expertise. This transaction will include a portfolio of over 5,000 patents, including foundational patents in standard essential video compression. Dolby Laboratories acquired GE Licensing for $429 million paid in cash. And Dolby Laboratories is in a financially healthy condition and was able to pay for the acquisition by using its cash as well as short-term investments and didn't have to take on additional debt. On September 27, 2024, Dolby Laboratories still had $482 million in cash and cash equivalents on the balance sheet and no debt. With such a healthy balance sheet, Dolby Laboratories can continue to grow by acquisitions as it can use the cash on the balance sheet and the free cash flow it will generate in the years to come for further acquisitions. Data by YCharts Dolby Laboratories could also use the cash for share buybacks - a capital allocation tool the business also used in the past. Since 2010, the number of outstanding shares has reduced from 116.14 million to 96.6 million right now - resulting in a CAGR of 1.31%. And while this is a rather moderate number, it is still contributing to bottom line growth. In the last quarter, Dolby Laboratories repurchased about 250k shares again and ended the quarter with about $402 million of stock repurchase authorization available. With a current stock price of around $80, this is enough to repurchase about 5 million shares and reduce the number of outstanding shares by about 5.2%. Overall, I remain very skeptical if Dolby Laboratories can grow with a high pace again in the next decade or longer. Of course, growth opportunities remain in theory. Aside from international expansion, there are of course many ways people are listening to music or watching videos without using Dolby yet, and here growth opportunities remain. However, it is easy to state a potential international expansion and in the coming decades, Africa, South America or Asia might help Dolby Laboratories to grow. On the other hand, Dolby Laboratories also had troubles growing in the last few years with the same potential opportunities. Dividend As a side note, Dolby Laboratories also increased the dividend by 10% and is now paying a quarterly dividend of $0.33. This is resulting in an annual dividend of $1.32 and a dividend yield of 1.6%. And the company increased the dividend for nine consecutive years now. Compared to earnings per share of $2.69, the company paid out 49% in dividends. Intrinsic Value Calculation In my opinion, the problem remains that Dolby Laboratories is trading for rather high valuation multiples. The company is probably still trading for a premium due to its wide economic moat the business has. Investors certainly valued consistency and stability and often ascribe higher valuation multiples to these companies. But in my opinion, the ability to fend off competitors and prevent other companies to take away revenue is only one part. A second part is the ability to grow revenue in order to justify high valuation multiples. And right now, the stock is trading for 30 times earnings per share and for 27 times free cash flow. Data by YCharts Additionally, we can calculate an intrinsic value by using a discount cash flow calculation. As basis, we are using 96.6 million outstanding shares and a 10% discount rate. We can use the average free cash flow of the last five years, which was $311 million. When assuming a growth rate of 4% of perpetuity, Dolby Laboratories must grow more than 10% annually for the next ten years to be fairly valued. Data by YCharts And while we can be optimistic and assume higher growth rates in the next few years - in line with management and analysts' estimates - I don't think Dolby Laboratories is able to grow more than 10% annually for the next ten years. When looking at the last almost two decades, Dolby Laboratories was able to grow with a CAGR of 9.26%, and the stock is still overvalued. In my opinion, we should rather calculate with growth rates in the mid-single digits at best and this would lead to an intrinsic value of at least $60 to $70. Conclusion I understand analysts and investors getting a little more optimistic as the results and the provided guidance are certainly solid and an improvement. The stock however is still not a good investment as the company must grow its free cash flow about 10% in the next ten years to be fairly valued.  On the other hand, at current stock prices, Dolby Laboratories might generate an annualized return of 7% or maybe 8% when buying the stock right now, and in exchange for the lower yield, we get a company with a wide economic moat and high levels of consistency.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485025104"}