Dolby Laboratories (DLB): Buy, Sell, or Hold Post Q4 Earnings?

Over the last six months, Dolby Laboratories’s shares have sunk to $65.28, producing a disappointing 9.7% loss - a stark contrast to the S&P 500’s 4.8% gain. This may have investors wondering how to approach the situation.

Is now the time to buy Dolby Laboratories, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think Dolby Laboratories Will Underperform?

Despite the more favorable entry price, we don't have much confidence in Dolby Laboratories. Here are three reasons why DLB doesn't excite us and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Dolby Laboratories’s 1.2% annualized revenue growth over the last five years was weak. This was below our standards.

2. Long Payback Periods Delay Returns

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Dolby Laboratories’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between Dolby Laboratories’s products and its peers.

3. Shrinking Operating Margin

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Analyzing the trend in its profitability, Dolby Laboratories’s operating margin decreased by 2.2 percentage points over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 18.5%.

Final Judgment

We cheer for all companies solving complex business issues, but in the case of Dolby Laboratories, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 4.4× forward price-to-sales (or $65.28 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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