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Is ZAGG the Perfect Stock?

Erin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When consumers buy a new tablet or smartphone, the very first thing they do is decide whether or not to buy insurance for it. The second thing they do is buy a protective screen for their new device, and a case to protect the product. And that is where ZAGG (NASDAQ: ZAGG) comes in.

The Utah based company makes accessories for mobile devices that include clear coverings that provide scratch protection for mobile devices including cell phones, iPads, tablets, and more. Additionally the company sells ear phones and power solutions for mobile devices under various brand names, including invisibleSHIELD.

The mobile computing industry continues has seen phenomenal growth in recent years. While companies such as Apple (NASDAQ: AAPL), Nokia (NYSE: NOK), and Samsung are the movers behind the mobile industry growth, the accessories market that improves and enhances the mobile experience have also benefited. Worldwide sales of mobile phones to end users reached almost 428 million units in the third quarter of 2012, according to a new report by Gartner. Overall mobile phone sales were down 3.1%, but smartphone sales were up 47% year over year. The Apple iPhone increased its 3.9% market share by 3.9% from the year ago quarter. Apple has sold over 23.5 million iPhones. According to Gartner, Apple and Samsung collectively accounted for 46.5% of smartphone sales worldwide. Samsung accounted for 22.9% of mobile phone sales, while Nokia took 19.2%. Nokia slipped from third place in the second quarter of 2012 to seventh place in smartphone sales in the third quarter of 2012, with 7.2 million smartphones sold in the third quarter.

The more mobile grows, so do the accessories market, including ZAGG.

ZAGG reported the 2012 fiscal year third quarter revenue increased 30% and earnings are up 54%.  Quarterly revenue was $59.8 million compared to $45.9 million the year previous.  Net income increased to $3.4 million, or 11 cents per share, up from $2.2 million, or 7 cents per share, the year before.

Worldwide smartphones sales are expected to continue to grow at a slower rate than years before, but still at a healthy rate.  Along with smartphone and tablet sales, mobile accessories will also continue to sell. ZAGG anticipates another healthy fourth quarter, which includes the holiday shopping season. Mobile devices, particularly tablets, (and therefore accessories), are expected to be a hot and popular product during the holidays and ZAGG has a new series of products to go along with it (including a keyboard, and accessories for the iPad Mini). Product placement deals with AT&T and Wal-Mart will continue to help the ZAGG grow as well.

The company has diversified its product offerings with the acquisition of iFrogz, which helps it compete with Skullcandy (NASDAQ: SKUL) with headsets, earbuds, and mobile device cases. iFrogz has generated about 25% of the total ZAGG revenue, and 20% of the net income.  The division now brings ZAGG about a quarter of the revenue and net income of rival Skullcandy.

The company is both at the mercy and behest of the mobile device industry. As the market has grown so have the number of competitors, including Apple itself. When the iPhone 4 launched Apple sold its own case for the first time, and some cases were offered for free to customers with antenna issues. However, Apple has not (yet) made a case for the newly released iPhone 5, and ZAGG has. But Apples has reintroduced its own screen protectors, after an unexplained hiatus.

If competition from Apple wasn't enough, touchscreen glassmaker Corning has improved its offering, developing a lighter and more durable glass surface, that over time, that could eliminate the need for ZAGG’s screen protectors.

ZAGG is not a guaranteed win or perfect stock. Things do look promising for the company and for the time being, numbers keep going up. ZAGG projects 2013 revenue in the ballpark of $259 million and $262 million, higher than the 2012 projected revenue of $256 million. ZAGG has enjoyed three years of 104% revenue growth (average) and 71% profit growth.

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ErinAnnie has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Corning, and SKULLCANDY INC. Motley Fool newsletter services recommend Apple and Corning. 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.

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