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Amazon (AMZN) looks overvalued with a P/E ratio of over 300 and a P/B of around 15. So how can investors take advantage of sales coming in from the new Kindle Fire HD tablets without investing in pricey Amazon? Dolby Laboratories (DLB) can provide some exposure.

From Yahoo Finance:

Dolby Laboratories, Inc. provides products, services, and technologies for the entertainment industry worldwide. It designs and manufactures video and audio products for film production, cinema, and television broadcast industries; and provides services to support film production, television broadcast, and music production. The company licenses its technologies to media software vendors, such as operating system vendors, independent software vendors, and integrated circuit manufacturers; and manufacturers of home audio and video products, set top boxes, video game consoles, mobile devices, in-car entertainment systems, and personal computers. It sells its products directly to customers, as well as through dealers and distributors. The company was founded in 1965 and is based in San Francisco, California.

Dolby currently contains a P/E of around 13, a market cap at about 1.5 billion, and a rock-solid balance sheet with a significant cash hoard; as well as an impressive quick ratio of just over 7. Dolby also maintains a profit margin of a little over 30%. Dolby Laboratories has established a strong, wide moat, and if they can successfully wedge themselves into the expanding tablet and mobile market, there will be potential for them to keep it. As competition heats up, there is a tremendous opportunity for Dolby to capitalize on growth if they can become the leading provider of sound for tablets.

Dolby was recently downgraded by Goldman Sachs analyst Ingrid Chung, who cited online video and increasing adoption of tablet computers as being a major force behind the decreasing demand for Dolby's products that currently rely heavily on optical drives in PCs and DVD players. Chung stated that, "Dolby gets less than 25 cents per tablet computer for its claim to AAC encoding royalties versus $1 to $2 per notebook computer."

With the Goldman downgrade in consideration, the area of concern they highlighted is currently being addressed and it is my belief that Dolby Labs will be successful in expanding into the mobile and digital market. Consumers will still demand premium sound playback if it is an option, even if they are streaming video or audio online, or whether on a tablet or PC.

Amazon is the first company to incorporate Dolby Digital Plus Audio into a tablet. Google (GOOG) is apparently experimenting with the company's audio technology with Samsung as well. With Dolby providing premium sound (as well as surround sound capabilities) to accompany the Kindle's high definition visual display, Amazon may have a game-changing tablet. It sets a standard for audio quality and differentiates the Kindle from its competitors in the tablet world.This may lead to much needed adaptation and future growth for undervalued Dolby Laboratories.

The key will be the adoption of premium sound in the rapidly expanding tablet market as an industry typical feature. If Dolby can successfully integrate its products in the current climate of mobile, they will be able to continue their growth and receive revenue streams in the future. If they fail to adapt and blend with the times, they may get stuck on the sinking PC ship.

There is definitely hope for the company, especially since partners of Google (like Samsung) look like they will soon adopt the Dolby Digital Plus Audio format and include it in their Android tablets. Microsoft (MSFT) will also be utilizing Dolby for their upcoming Windows 8 tablets and PCs. This clears up the concern amongst investors that Dolby might be shunned from the upcoming Windows 8 release. Dolby mobile is making progress, and in my opinion will continue to do so, making the downgrade from Goldman a temporary setback for a solid company with the necessary tools to continue to grow revenues and shareholder value.

The slowing growth in the PC market will obviously affect Dolby, but they are offsetting this with a growing presence in the mobile world. This will be mandatory for their survival down the road, seeing as licensing to OEMs makes up over 80% of their current revenue. Dolby is also continuing to establish itself as the leader in home entertainment and 3D video, which will eventually lead to even more channels for them to take advantage of. I believe they will successfully adapt to the mobile environment, as well as continue to remain innovative and maintain their status as the industry leader in audio and video quality. With a good customer base, solid balance sheet, and a clear recognition for the need to adapt, I see Dolby as a buy.

Source: Finding The Future Sound Of The Tablet Market In Dolby