What happened
Shares of Dolby Laboratories (DLB 0.81%) were down 13.6% at 4 p.m. EDT on Aug. 2, erasing nearly 9% in gains since the beginning of 2019 and putting the stock down almost 5% on the year. Today's big sell-off was a product of investor reaction to the company's fiscal third-quarter earnings, which came out after market close on Aug. 1.
So what
Dolby reported revenue of $302.2 million, up 41% from last year, and earnings of $0.38 per share, nearly 13 times higher than last year's $0.03 per share income reported under generally accepted accounting principles (GAAP).
Image source: Getty Images.
Although Dolby delivered big increases on both the top and bottom lines last quarter, it looks like investors are selling it today for coming up short of expectations -- Wall Street analysts were expecting $0.49 per share.
But that's only part of the story for Dolby, which is growing its business around the world and counts China as a particularly important market. Clearly the biggest news driving the stock market in recent days is that President Donald Trump raised the stakes on global trade: To be specific, his administration intends to implement another 10% in tariffs that would affect $300 billion in goods imported from China to the U.S.
Now what
On one hand, the ongoing trade war between the U.S. and China does raise a threat for Dolby, at least in the near term. Moreover, Dolby management pointed out on the Q3 earnings call that growth in that country has slowed in recent quarters. As CEO Kevin Yeaman said about the macroeconomic factors involved: "[I]t's hard for me to draw a straight line through any one of them, but that clearly contributes."
In other words, the combination of short-term impacts from an escalated trade war and a slowing of growth due to multiple other macroeconomic issues is affecting the company.
What should investors do? It's hard to say what happens next, but in the short term Dolby's stock could remain pretty volatile. Today's sell-off left shares close to the 52-week low, and based on both trailing and forward earnings, this is as cheap as the stock has been in the past year.
If you've been looking for a good entry point, this could be it. That's not to say that shares can't go lower -- there's a very reasonable thesis that they could fall further from here, particularly if the global economy continues to weaken and the U.S. continues its trade war with China.
Dolby is a great business with an important role -- delivering great sound in the entertainment industry and consumer electronics -- and I think that position will continue over the long term. I wouldn't call it a bargain even after today's sell-off, but it's certainly worth putting on your watchlist.
