Pump Up the Volume: Dolby Labs – The Perfect Pick?

Over the past few months, I’ve become increasingly convinced that Dolby Labs (DLB) will be a market superstar in the years to come. Sales are up 20% per year with 32% margins. The have $420 million of free cash and short term investments and almost no debt. They have massive insider ownership (50%) and because of the troubled market right now, they’re trading at a deep discount… about 25% off it’s 52 week high. That’s a steal for this company.

Dolby does have competition, but they’re still by far the brand leader. They have the brand recognition, the “mind share”, that’s so important. Just like Intel’s Intel Inside logo means quality for computing products, Dolby Labs Double D logo will become the sign of quality on any sound imperative products.

Without getting into the specifics of what makes Dolby’s actual technology better, you can just look at it in business terms: Dolby collected $571 million in mostly licensing revenue in the past four quarters. Mostly licensing; You see, Dolby doesn’t make the actual components that go into your stereo or DVD player or phone or whatever – instead, it licenses it’s technology to companies like Sony (SNE), Microsoft (MSFT), and Motorola (MOT), which incorporate the technology into their products on their own. It’s a brilliant, low-cost/high-profit business plan.

In 2006, more than three-quarters of the company’s revenues came from licensing. Its sound technology is already the standard digital format for next-generation DVD players, as well as a requirement for all new TV tuners being sold this year and beyond. Add gaming systems and its cinema sound technology, and Dolby is poised to conquer.

Founder Ray Dolby, the man who is responsible for most of the high insider ownership, is a genius. He has numerous doctorates and has been inducted into the National Inventors Hall of Fame and the Consumer Electronics Hall of Fame.

The bottom line is, Dolby is a dominant brand name, they have great financials, great past growth and future growth potential, they’re relatively ignored on Wall Street, and they have a fantastic, genius management team. I really think Dolby Labs (DLB) is going to be the next Intel or even Apple. In my opinion, if you could only invest in one stock, this one is it. Buy and hold for the next 5-10 years.

That’s my take on them, but I’m interested to hear what you think. Did I get it right or was I way off on this one? Let’s hear what you have to say. Leave us a comment.