Dolby is Back

Dolby surged 17% on the news of revived Windows 8 deal with Microsoft. It doesn’t really matter whether or when such deal happens. Dolby as a matter of fact, is providing the more effective and efficient solutions than its main competitor, DTS (“Dolby vs DTS Surround Sound”). When there are more devices on the move and more contents delivered via Internet or from the cloud, efficiency, which means delivering same high quality sound with less bandwidth, matters more. No matter what devices people are using, they surely want to hear high quality sound. Dolby is the obvious choice. It’s the user experience matters most in the entertainment industry. And Dolby just has the right product.

Besides the technical advantage on the efficiency, Dolby is also moving ahead at all fronts. Dolby wins naming rights to Hollywood icon only a few days earlier before the date they stroke the deal with Microsoft. Last month, Dolby Laboratories, Inc. (NYSE: DLB – News) and Royal Philips Electronics (NYSE: PHG; AEX: PHI) unveiled Dolby® 3D, a 3D HD format and suite of technologies designed to deliver full HD 3D content to 3D-enabled devices, including glasses-free displays. Dolby 3D is being demonstrated at the NAB Show® (April 16–19, 2012) at booth SU1212. Not to mention Dolby Atom, also announced last month by Dolby, is the most significant innovation in years and represents the future for entertainment sound in cinema.( “Dolby Atmos Is the Future of Entertainment Sound”)

I never doubted that Dolby is one of the ideal companies an investor can find in this world. (“Dolby Lab Is on Sale“) When Dolby’s share price dived last year, I bought more. I thought it will take longer time to bounce back. It now seems coming back beyond my expectation.

Infinera, the Jean Maker in Web Gold Rush

We all know the famous story of Levis Jeans. (http://inventors.about.com/od/sstartinventors/a/Levi_Strauss.htm) When the California gold rush was in full swing in 1853, Levi Strauss invented Jeans, which satisfied the demand of miners who wanted strong lasting pants.

Now, it’s the web gold rush. Companies (Apple, Microsoft, Amazon, Google, YouTube, Netflix and etc.) invested billions of dollars in smart phone, Internet TV, web games, cloud computing, video streaming and so on. All these businesses have to deliver their content or services via networks. Cisco predicts that the number of network-connected devices will be more than 15 billion, twice the world’s population, by 2015. In the fifth annual Cisco® Visual Networking Index (VNI) Forecast (2010-2015), the company also said the total amount of global Internet traffic will quadruple by 2015 and reach 966 exabytes per year. With this projection, the industry needs strong lasting networks, which mean scalable, liable and easy to manage networks.

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High Speed Crash

The recent Crash of 2 high speed trains in China is not only a reminder of the danger of building a high-speed railway network in high speed without proper management, but also a reflection of vulnerable situation of Chinese economy and the corresponding political system.

One of the lessons learned from the crash is that when the speed is close to the limit, it’s dangerous. In addition, paying the high price for that kind of speed is also not worth it. Having learned the lesson, the Chinese government adjusted the speed limit of the high-speed train and the corresponding prices lower. However, many investors or speculators of the stock market in China don’t seem to learn the same reasoning behind.

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Steve Jobs Stanford Commencement Speech 2005

I am honored to be with you today at your commencement from one of the finest universities in the world. I never graduated from college. Truth be told, this is the closest I’ve ever gotten to a college graduation. Today I want to tell you three stories from my life. That’s it. No big deal. Just three stories.

The first story is about connecting the dots.

I dropped out of Reed College after the first 6 months, but then stayed around as a drop-in for another 18 months or so before I really quit. So why did I drop out?

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Dolby Lab Is on Sale

The share price of Dolby is now at $49.84 with a PE of 19. There were $1022 million in current assets and $186 million total liabilities in its first quarter’s balance sheet, among which $148 million were current liabilities. What a balance sheet! Among it, cash and short-term investments were at $787 million, long-term investments were 347 million. Adding these together, it’s $1134 million in cash and investments. With 113 million shares, it’s almost $10 per share. That means the actual price for Dolby is at $39.79, low than $40. With this, the actual PE is now at 16. If you think that Dolby will grow at 16% annually in next five years, the current price seems reasonable.

To get into deeper on the valuation of Dolby, I used discounted cash flow method. With growth projection of 10% annually in next 5 years, Dolby’s intrinsic value per share is $56. Adding $10 per share from cash and investment, Dolby’s intrinsic value per share is $66. The current price of 49.84 is almost 25% discount of $66. The current price is actually predicting that Dolby will grow even slower than 5% annually in the next 10 years.

The very question is “Will the growth of Dolby be 10% annually or even slower in next 5 years?”

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Business Owner VS Share Holder

Now most of people know who Warren Buffett is. However, few really believed that a share holder of a public company is practically a business owner. To many people, including entrepreneurs and financial professionals, shares are papers exchangeable for cash. They buy shares simply for the hope of selling it at higher prices later. That’s why when people talk about shares they often raise questions like these:

Why do you think the price will go up (or down) for XYZ stock?
Is this the bottom of the market now?
Has ABC industry a good prospect in near future?
Shall I sell the shares of XYZ Company, when its share price goes down more than 8%?
Will there be a bull (or bear) market in the later half of the year?

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Burning Tough

2010 is the most difficult year I had went through as an investor. The only certain thing about the economy in 2010 is uncertainty. As I mentioned in my last article “Is this party time again?” China is still facing the same economic problem and the share market performance after the National Day is well reflecting such dilemma. Fortunately, I had invested mostly in US companies in last year and still got a 19% return on my portfolio.

At this very beginning of 2011, it’s again very difficult to predict the economic picture of the whole world. The key issue now is not US unemployment, neither government debt in certain European countries. It is China’s run-away inflation and “burning” (hot is not the right word now) property market having the potential power to suck everyone into another crisis. Why?

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Is This Party Time Again?

The share prices in worldwide stock market went up in the past 2 weeks. As an investor, I should be very happy with the capital under my management fully invested in US and HK markets. However, it’s China again. Although we only allocate a small portion of our capital to invest in the China A shares, we had only invested even much smaller portion before October.

Have we missed the party? Many people may regret for not plunging into the market earlier, or at least feel itchy to get into it now. I don’t think so. The Chinese economy is still in serious uncertainty at best, considering the huge property bubble and lacking of purchasing power in ordinary Chinese people. The fundamentals have not changed over the so called National Day. The bubble popped up by the inflation and speculation on the RMB exchange rate will bust at any time. However, it seems that the governments around world are all determined to print more money and a worldwide inflation is almost inevitable, especially if the Chinese government keeps the interest at such low level. Investing in natural resources should be a good idea under such circumstance, as many investors have been doing. I personally don’t like the idea because the commodity prices are largely decided by the world economy, while the economy is very hard to predict. Investing in good business is always a good idea, no matter in good or bad economy. A good business can not only survive a recession, but also grow stronger in a recovery.

Support Google’s stand

We strongly support Google’s decision not to accept Chinese censorship of searches made on its system in China. Doing the right thing is the most important thing for people who are not struggling for their survival, especially for rich people, because adding a zero to their earnings doesn’t make a lot of differences to a millionaire or a billionaire, unless he is lost in the money world. Cooperating with a government who deprives its people of rights of free speech and actively participating in the action is not just a business, but a crime!

Not Be Fooled by Viagra

There are many professional investors talking about the low valuation about the Chinese A shares recently. They even compared the price of H share or B share of the same company with its price of A share, and discovered that the A shares of certain companies are cheaper than their counter part in H or B share market. Therefore, the pros declared that A shares are cheap and the Chinese investors are again immature. It seems that they are right with the surge in the A share market on the 2nd day today.

Well, you can not just rely on the economy figures from the Chinese government to make your judgment on Chinese economy. If you had friends living and working as a slave of their properties, or you had taken a ride recently on the very new high speed train and realized that the train had been transporting chairs instead of passengers, or you were receiving promotion materials selling properties desperately located in some ghost town in your email box on weekly basis, you would not agree with these professionals.

China economy was sick even before the financial crisis from the US. And it’s now in a more sever condition now due to last year’s government policies. The policies and money were mostly aimed at creating an instant surge on the GDP, not on the health of the over all economy and well-being of its people. It was like a very sick man being given a Viagra and suddenly he’s up. And ladies desperately missing an orgasm were all cheering. However, a sick man shouldn’t have such erotic actions based on our common sense. It only made his health worse! Now, the effect of Viagra is over. He looks like shit!

With these in mind, the prices of A shares in general are still not cheap enough to cover risks of a property market crash, very likely defaults of local government loans, a possible banking system melt down and some unexpected skeleton in the cupboard.