The sci-fi flick “Gravity” is tearing it up at the box office.
The film, which stars Sandra Bullock and George Clooney, tells the tale of a “routine” space shuttle mission gone wrong, grossed $55.8 million for its weekend release earlier this month. Reviews have been stellar. Oscar talk has already started.
Audiences are saying that the amazing special effects – known as “F/X” in the movie biz – are a key reason they dig this film so much.
And critics are saying it’s the amazing digital sound effects that make the movie seem so realistic and that could lead to an Academy Award nomination for “Gravity’s” audio quality.
But here’s what I want to tell you – and it’s something that moviegoers and critics know nothing about.
There’s a great way for tech investors to cash in on this revolutionary audio technology. It’s a company I know very well.
In fact, it’s a stock that could easily double your money.
The Music Man
Ever since I can remember, I’ve been fascinated with sound. I’m talking about the “technical” aspects of sound.
I consider the audio quality almost as much as the music I listen to or the films I watch.
I’ve put this obsession to good use. Even after I launched my career as a tech guru, I continued to “front” my own bands at night and on weekends.
Besides playing more than 150 live shows, I also recorded and released five compact discs of music. I was in the studio for hours listening to every detail for the mixing and mastering of those recordings.
So, when it comes to understanding audio technology, you could say I’ve really paid my dues.
And there’s one company – a mid-cap technology leader – whose products I’ve been using in one fashion or another for just about every day of my entire adult life.
That hard-won experience is a major reason why I’m such a big fan of Dolby Laboratories Inc. (NYSE: DLB), whose headquarters are situated about a 20-minute drive from me in San Francisco.
Since its founding in 1965, Dolby has set the standard in sound quality across a wide and growing range of audio systems and film soundtracks. Today, it is best known for creating the high-definition, multi-channel audio that Hollywood simple can’t live without.
Indeed, you’d be hard-pressed to find any major brand audio or video player that doesn’t employ at least one of Dolby’s digital formats. We’re talking hundreds of millions of compact discs, DVDs, audio and video players and receivers.
Racking Up the Oscars
When it comes to audio technology, Dolby has a history of pushing the limit.
And “Gravity” – along with the film’s sonorous sound effects – has put Dolby back in the spotlight, and reminded investors of the new sound platform that made it all possible.
The high-tech magazine Fast Company said “Gravity” sound effects were an “equally astounding part of the thrill” of seeing the hit movie. Audio-video trade journals are just as impressed.
The focus of their admiration is Atmos, the new surround-sound movie system that was just released last year.
With Atmos, a theater projects sound effects throughout the room to precisely match the special effects that are unfolding on screen.
Dolby’s Atmos Cinema Processor CP850 is tailor-made for today’s digital cinemas and gives audiences the most realistic sound available. Combined with specific speaker location, Atmos renders a real-time custom mix for rooms that accurately replicates the exact audio experience intended by the sound mixer.
The success of “Gravity” and the Atmos system should generate more sales for Dolby. The company is already famous for its work in pioneering the multi-channel surround-sound systems that are now integral to today’s movies, especially those filmed in the high-definition (HD) format.
Now you know why Dolby has won a string of awards that include several Oscars for technical achievements. Last year alone, nearly 10 films using some form of Dolby audio were up for Academy Awards for sound.
In fact, for the past 35 years, every film that has earned an Academy Award nomination for either sound editing or mixing relied on Dolby audio technology. And that list includes such winners as:
- “The Hurt Locker.”
- “Raiders of the Lost Ark.”
- “E.T., the Extra-Terrestrial.”
- And “Saving Private Ryan.”
The Sound of Money
For investors like us, all that we’ve discussed so far adds up to only one thing: A hefty profit potential.
That’s because Dolby is the kind of high-margin business that we look so carefully to find.
Dolby has a 21% profit margin and earns more than 12% on stockholders’ equity (ROE).
The company is also a cash-flow machine.
Dolby is sitting on roughly $518 million in cash and has no debt. Last year, it generated nearly $122 million in free cash flow (FCF). And it’s a shareholder-focused company, returning some of that cash back to shareholders with a high-enough payout to give the company a 4% dividend yield.
One of the reasons we’ve been so successful in delivering big-profit winners to you here at Strategic Tech Investor is that we’ve been able to “see” miscast and misidentified companies in their correct light.
Take Dolby, which lots of folks view as a hardware or turn-key “systems” company.
That’s nowhere near as sexy – or as valuable – as, say, a software firm.
And that’s what Dolby really is.
You see, Dolby does sell “editing” stations. But most of its revenue comes from licensing its technology to other companies. For instance, Dolby Digital Plus already resides on more than 640 million devices around the world. And those devices cover the gamut – including everything from “smart” TVs to gaming consoles to Blu-ray DVD players.
And when it comes to the new trend of online streaming, Dolby is definitely in the mix. It has struck deals with the surging Netflix Inc. (NasdaqGS: NFLX), VUDU and CinemaPlus from Best Buy Co. Inc. (NYSE: BBY). And Dolby’s technology resides on millions of cable-TV set-top boxes.
Dolby also has partnered with European electronics giant Koninklijke Philips N.V. (NYSE: PHG) to provide viewers with a 3D TV experience that does away with the need to wear those silly glasses. This tech also works on laptops, tablets and smartphones, Dolby says.
The Catalyst Nobody Sees
The shares have finally started to show some life. So far this year, the stock has rallied some 25%, with half of that coming in the last six weeks.
Dolby shares are currently trading at about $35 a share, giving the company a market value of $3.6 billion.
And the stock still has plenty of upside. The stock sold off back in late 2010 after the company lowered guidance for its 2011 fiscal year.
If Dolby simply regained its three-year closing high of $69.51 set just before that sell-off, you’d be looking at a double from here.
And the catalyst for that rebound might be just around the corner.
Dolby reports its fourth-quarter and fiscal-year results on Oct. 29.
If the company builds on the recent Atmos buzz – and demonstrates progress in controlling costs – you could see the stock gain some real traction,
And very quickly …
Rest assured that we’ll be keeping an eye on Dolby.
In the meantime, if you end up going to see “Gravity,” drop me a line and let me know what you think of the flick – and the sound “F/X” created by Dolby.
Because, hey, that’s the kind of “investment research” that can be a real blast.
We’ll keep you posted.
[Editor’s Note: Thanks to you folks for the kind and useful comments on last week’s column on Apple Inc. (Nasdaq: AAPL). I use your input to help guide our choice of future topics. And, as I also noted, the publisher here at Money Map Press uses your postings to determine which of these “free” e-letters are worth continuing. So your posted questions, comments, compliments and suggestions are both useful – and welcomed.]