Dolby gets Hammered (DLB)

Just a week after Dolby Labs (NYSE:DLB) scored an upgrade to Market Outperform by Avondale and an outright Buy from Deutsche Bank, Goldman Sachs (NYSE:GS) has downgraded the stock to a Sell.

What gives?

Goldman expects Dolby to beat Q4 FY 2010 estimates, as well as expecting future guidance to be the key focus. FY2011 guidance is expected to be conservative and is unlikely to include consensus within its range. Historically Dolby has been a beat and rise stock and estimates have been materially above consensus.

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Goldman Sachs analyst Ingrid Chung cut her rating on the stock to “Sell” from “Neutral” and cut her price target to $50 from $72, writing that the company’s Q4 report will be a peak for the company’s financials.

The main part of the thesis is that online video consumption and tablet computers are going to see increasing adoption, which will drive down the need for DVD players and the optical drives in PCs, thus reducing demand for the company’s codecs in those devices. Revenue coming from tablet products such as Apple’s (AAPL) iPad is lower than for traditional PCs and DVD players, Chung writes.

Dolby gets less than 25 cents per tablet computer for its claim to AAC encoding royalties versus $1 to $2 per notebook computer, she observes.

Bottom Line: Fellow Stock Masters, I for one am having a hard time buying into the analysis over at Goldman Sachs. Perhaps their downgrade is a ploy to get in on the stock for cheap? I'm going to have to go with Deutsche Bank analyst Brian Thackray, who recently raised his rating on the stock to Buy from Hold, with a new target of $75, up from $70.

The analyst notes that the stock is down 13% since July, due in part to concerns of slowing TV and PC sales. But he thinks that those issues should be offset by adoption of Windows 7 in the PC market and growth in the China TV sector. “The bottom-line is that Dolby has exceeded expectations for over 4 straight years and every once in a while, a buying opportunity exists,” he writes. “We think this is one of them and that growth remains robust.”