And today, Dolby is trading down by another 18%. What's going on here?
What's so darn scary?
By the numbers, Dolby did better than all right: Sales fell 5% year-over-year to $219 million but Wall Street had expected a steeper 6.4% swoon. Earnings held steady at $0.55 per share, slightly above Wall Street's $0.54 target. The year-ago quarter was boosted by a one-time change in revenue recognition practices, and Dolby has lowered prices on its range of 3-D and digital cinema products.
In other news, the share buyback program was running out of cash and was redoubled with an additional $250 million authorization. That's a shareholder-friendly move that often bumps stock prices even before the buybacks begin. Furthermore, management raised its full-year earnings guidance to overlap with analyst estimates.
And if that was the whole story, Dolby might have been all right. But it isn't the whole story.
On the analyst call, CEO Kevin Yeaman noted that Microsoft
Calm down, everybody
Yeaman explained that the revenue going into PC systems should shift from billing Microsoft directly to a mix of system builders, DVD-playing software makers, and other third parties. But the market is taking the news as if Dolby will lose that market altogether. And it's an important cash cow: PC-related revenue in 2011 is about $240 million, or around a quarter of Dolby's total sales.
About $80 million of that annual revenue comes from the market portion where Microsoft would show up, leaving about 8% of total revenues up for discussion. If Dolby is successful in shifting the majority of that onto Dell
If not, well, an 18% drop seems overdone anyhow, particularly since Windows 8 won't be a meaningful market player until 2013. Management has plenty of time to figure out a strategy here. Microsoft won't kill Dolby, though chief Dolby rival DTS
These ghosts aren't real
Besides, tablet computers and smartphones are eating into the traditional PC market. How likely are you to buy a full-blown PC the next time you're looking for a home-entertainment hub? Chances are, not very. And Dolby is busy opening markets among the mobile device makers as well, not to mention its established strength in set-top consumer electronics.
And if you're worried that the future will be so darn digital that Dolby won't matter anymore, you should know that important online-media players including both Apple
I think that this panic is downright silly, and that Dolby shares have never looked more attractive. The company is expertly positioned in the ever-changing entertainment industry, and what Dolby might lose on the PC will come back to tablets and digital media hubs.
To take advantage of this mispricing, I just added a long-term "outperform" rating on Dolby in our CAPS system, where I expect it to boost my All-Star ranking for years to come. If you're not quite ready for that kind of commitment, you should have a gander at this short video where our finest Foolish analysts compiled a laundry list of reasons why Dolby should double or even triple in the near future. By pushing down harder on the stock, Mr. Market just loaded Dolby's spring for an even stronger bounce. Watch the video now -- it's totally free, so you've got nothing to lose -- and maybe then you'd want to come back to follow my lead in CAPS.