Stock Madness Elite 8: Dolby Labs

Dolby Labs vs. Starbucks

It might not be a slam dunk, but we already know Dolby Labs (NYSE: DLB) is far and away the leader in its field. With little in the way of meaningful competition, its technology is not only the industry standard but as each new generational advance comes along, Dolby becomes the sought-after technology leader.

You telling me some java-sippin' Joe at Starbucks (Nasdaq: SBUX) is gonna be able to crank up the volume against Dolby? I appreciate that Howard Shultz has been dragged back out of the mothballs to save his company from irrelevance, but those hoop dreamers need to wake up to the reality that Dolby is in a full-court press for world domination.

Now hear this!
Dolby's fortunes are tied to a number of technologies, but it has been most closely associated with the DVD player. In fact, DVD player sales have for a long time accounted for half of its licensing revenues, probably just as long as people have been predicting its demise. Time and again, though, the three-time Motley Fool Stock Advisor recommendation has put the prognosticators to shame, surpassing analyst expectations by about 35% on average.

It faces nominal competition from DTS (Nasdaq: DTSI), SRS Labs (Nasdaq: SRSL), and QSound Labs (Nasdaq: QSND), but has around five times the revenue of all of them combined. It's also considered to have the leading technology for all of the next-generation advances we will see in consumer products. Let's take a brief look at each.

• Next-gen DVD players

It was a short but bloody fight to see Blu-ray DVD emerge victorious. Dolby, as would have been the case had HD-DVD won, is the industry standard here. Prices for the next-generation DVD player are falling, making the decision to upgrade easier. As more movies are shot in the format, expect to see the players sell more. It's been a concern that falling DVD sales will hurt Dolby's bottom line, but Blu-ray player sales should eventually ease those concerns.

• Computers

A recent downgrade by an analyst sent Dolby investors into a tizzy as shares fell on the news. The analyst's concern was slowing PC sales for the second half of the year. I think those worries are overblown. Laptops, where most computer sales occur these days, grew 41% in the fourth quarter of 2007, according to the market researchers at DisplaySearch. Analysts at IDC foresee annual growth above 10% even in 2012. Seems pretty robust even in a dour economic climate.

With more and more of Dolby's sales tied to the Vista operating system from Microsoft (Nasdaq: MSFT), the news that the Wizards of Redmond are dropping prices on Vista should spur even more revenues there.

• Hi-def TVs

Dolby got a boost when new TV tuners were mandated for inclusion last year, and it will get another when all broadcast TV signals will become digital starting in February. With Dolby again the industry standard and included in both the new tuners and new TVs, and as more people upgrade their home theater systems to the latest models, Dolby will get a cut of those revenues.

• Digital cinema

Speaking of cinema, digital movie systems are rolling out in ever greater numbers of theaters here in the U.S. as well as internationally, thanks to Access Integrated Technologies (Nasdaq: AIXD), which has a commanding 80% share. Dolby, on the other hand, holds second place (to Doremi) in the digital cinema server market with a 9% share. But with less than 6% market penetration, digital cinema is still anyone's game, particularly with analysts forecasting 48% penetration by 2012.

These four areas are Dolby's playground. It has been and will continue to be the industry leader. If there's one stock you must buy, Dolby should make the short list of any March Madness contender.

Agree? Then head on over to Motley Fool CAPS and give Dolby a venti thumbs-up over the warmed-over cup of mocha joe Starbucks.

Ready for Stock Madness? Who's going to take home the trophy? See the rest of this year's bracket.