This Unknown Stock is Leading the 3-D Revolution

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"Everything is better in 3-D" seems to be the mantra of media these days. It's not hard to see why. James Cameron's Academy Award-nominated movie Avatar may have shattered box office records, but it hasn't been the only 3-D box office success.

Top 10 3-D Movie Releases

Movie Title


Release Date

Total U.S. Box Office

Avatar

12/18/09

$743,767,458

Alice in Wonderland

03/05/10

$319,380,754

Up

05/29/09

$293,004,164

Monsters vs. Aliens

03/27/09

$198,351,526

Ice Age: Dawn of the Dinosaurs

07/01/09

$196,573,705

The Polar Express

11/10/04

$181,320,482

A Christmas Carol

11/06/09

$137,855,863

Chicken Little

11/04/09

$135,386,665

How to Train Your Dragon

03/26/10

$134,787, 856

Cloudy with a Chance of Meatballs

09/18/09

$124,870,275

*Source: Boxofficemojo.com

It's hard not to geek-out over 3-D if you're a technophile: the visuals are stunning, the experience immersive. And if the movie is halfway decent, why, that's just a bonus. Not bad for $15 a ticket. These kinds of box office receipts have breathed new life into the major cinema chains and sent shares soaring. Now that 3-D technology has finally made a lasting mark on the silver screen, "everything is better in 3-D" should be words to live by for investors, too.

One company that seems especially primed to benefit from this sea change is Dolby Labs ( DLB ) . Dolby entered the 3-D projection business in 2007, and currently holds about 12% of market share . RealD, a privately held company, holds about 83% of market share. It may seem like RealD has a lock on the market, but there are several factors to consider.

Demand for 3-D screens is surging. At the end of 2009, there were slightly more than 3,000 3-D screens in the United States -- 388 of them using Dolby projectors. But the company shipped more than 800 units alone in the first quarter of 2010 ending in January. The pie is also getting bigger: industry experts predict there could be as many as 15,000 3-D screens worldwide by the end of the year (roughly double the current number) and Dolby already has a significant share of the global market.

There's only one problem: Outfitting a single screen to show 3-D movies can turn into a $100,000 affair. The upfront cost for Dolby's projectors is slightly more expensive than RealD's (about $26,000 vs. about $20,000), but Dolby's projection technology allows theater operators to show both traditional 2-D and 3-D movies without having to spend money on a special silver screen for 3-D.

And you can't have a 3-D movie without the glasses. Dolby faces a challenge in this area. RealD uses disposable glasses that cost about a dollar. Dolby's glasses aren't disposable and cost about $17.50. The company claims its 3-D glasses can be cleaned in-house and reused hundreds of times, thus lowering the cost. But it presents a marketing challenge nonetheless. Dolby must convince theater operators that its 3-D projection kits are cheaper in the long-run in order to gain business and continue growing. Given Dolby's sterling reputation for innovation and technical savvy, that shouldn't be a problem.

Revenue from 3-D projectors is already propelling growth at Dolby. The majority of revenue comes from licensing Dolby's patented audio and home theater technologies, but about $47.7 million, or 21%, of $221 million in total revenue came from "product sales" in the first quarter of fiscal 2010, compared with just $17.9 million, or 9%, a year earlier. Most of these product sales are 3-D projectors. Revenue from this segment has more than doubled in a year and could be in the beginning stages of a long-term growth phase. More than 40 movies are expected to release in 3-D within the next three years compared to just a handful in 2008, so demand isn't going to dry up soon.

Movie studios and theater chains may be gearing up for 3-D, but this is just the tip of the iceberg for Dolby. Companies like Panasonic ( PC ) and Sony ( SNE ) are making forays into 3-D televisions as well. The cable networks are getting involved too: ESPN is planning to showcase up to 25 World Cup soccer matches on a special 3-D channel along with a total of 85 sporting events in 2010 and a coalition of Discovery Communications (Nasdaq: DISCA) , Imax (Nasdaq: IMAX) and Sony also have plans to launch an as-yet unnamed 3-D network in 2011.

This is the real wild card for Dolby. A 3-D television (with 3-D programming) becoming the next "necessity" for every home theater could mean tremendous upside for the company. Not only could Dolby use its experience in 3-D technology in this space, but the home theater market get a boost as a whole.  

The 3-D TV transition is still several years away, however. For one thing, 3-D TVs are expensive (north of $2,000, to be exact). It will also take cable providers and networks some time to roll out 3-D networks (they haven't even finished rolling out high-definition channels yet).

At 29 times earnings, Dolby's shares appear expensive, but are actually in line with their long-term average. The company has few direct competitors, and has a unique business model of licensing, which makes for an almost-unheard-of operating margin of 47%. Given these factors, it's understandable why investors would place a premium on the shares. Dolby's stock is up +68% year-to-date, but appears to be on a long-term winning streak. As the 3-D revolution takes form, expect Dolby to create an irreplaceable and highly profitable niche for itself.

Brad Briggs
Staff Writer
StreetAuthority

Disclosure: Brad Briggs does not own shares of any security mentioned in this article.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Stocks

Referenced Stocks: DISCA , DLB , IMAX , PC , SNE

Brad Briggs

Brad Briggs

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