A Foolish Call on ZAGG
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the more controversial companies in the market is Zagg (NASDAQ: ZAGG), and on Friday the company’s stock rallied 6.36%, while the market traded lower. There was no news from the company to entice such a foolish rally. There were no upgrades, increases in guidance, or anything else, with the exception of rumors or speculation that ZAGG products may soon find itself in Apple (NASDAQ: AAPL) stores. Supposedly there was a call in which the company said it was in talks with the world’s largest company, although I have been unable to verify this information. However, it did create some excitement and now the stock may be positioned for future gains.
A Foolish Call on ZAGG
Zagg is a very interesting company that has increased in value by nearly 12% over the last month, in anticipation of the iPhone 5 launch. The stock had initially traded higher prior to the opening weekend of the iPhone 5, but then sold off last week after sales were below expectations, due to supply of the iPhone. The reason that iPhone sales are so important for ZAGG is because its success is directly tied to the success of Apple. ZAGG is the industry leader in protective shields and casings for smartphones and tablets, and of course Apple is one of its most targeted brands. Therefore, if ZAGG were to reach an agreement to sell its products in Apple stores it would be a game-changer for the company.
In my opinion, ZAGG did a magnificent job at supplying its products for the iPhone 5 launch, and I anticipate strong sales. The company is priced attractively, with a forward P/E ratio of just 8.45 and a price/sales of 1.06. The company has strong cash flow, good margins, significant growth, and its stock is cheap. However, the key with ZAGG over the next four months will be to understand that its stock will be volatile. But as of now its valuation makes it attractive, thanks to the resignation of its previous CEO and concerns surrounding long-term growth.
As a long-term investment I have some consernce over ZAGG's prospects. Its success is too dependent upon product launches and the sentiment is too negative surrounding the company, with strong short interest. However, I think its current price is setting up nicely for a future short squeeze if the company can capitalize on the demand of the iPhone 5 and a potential iPad mini launch later this year. The company has a long history of growth and has executed every year with great success during product launches. Therefore, I see immediate upside in shares of ZAGG and I think it may be worth buying and holding for the remainder of this year.
My only concern regarding ZAGG is margins. Last year margins declined, despite the fact that the iPhone is one of its greatest contributors to revenue. This is important because there were no changes in the design of the iPhone 4 and 4S, meaning ZAGG was able to use excess supply during last year’s launch, which resulted in record margins in Q4 of 2011. This year the designs had to change, due to a new iPhone 5 design, which will impact the company’s bottom line. However, in the past, investors have been more accepting of inconsistent margins for large demand and bullish sales. Hopefully, this trend will continue, and hopefully there are no additional surprises that might have forced the company’s founder and previous CEO to resign. With all things considered, especially its valuation and short-term sales potential, I think ZAGG makes an interesting play during the next few months, but we'll have to wait and see about its longer term upside potential.
BrianNichols owns shares of Apple and Zagg. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.