Are Tablet Accessory Companies a Good Investment?

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

ZAGG (NASDAQ: ZAGG) the company that made a name for itself making clear coverings for mobile devices, like the invisibleSHIELD, saw net sales skyrocket 30% in the fourth quarter.

Much of ZAGG’s success continues to depend upon the growth of the mobile computing industry. The company’s products are made to accompany mobile computing devices, such as tablets, and smartphones.

Does ZAGG's success mirror the success of the mobile computing or smartphone industries?

While tablet shipments increased 74%, ZAGG gross profit increased 47% percent over the year previous. Net sales for the full year 2012 increased 48% to $264.4 million from $179.1 million in the previous year. Gross profit increased 47% percent over the year previous. ZAGG did well, but the tablet industry did better.

Worldwide tablet shipments reached a record 52.5 million units worldwide in Q4 2012, according to preliminary data from IDC. The tablet market grew 75% year over year in 4Q12 (up from 29.9 million units in 4Q11) and increased 74% from the previous quarter's total of 30 million units. (The record-breaking quarter for tablet sales is also notable compared to the declining PC market, which saw shipments drop for the first time in more than five years during the quarter.)

The mobile computing industry continues has seen phenomenal growth in recent years. While companies such as Apple (NASDAQ: AAPL) and Samsung are the movers behind the mobile computing industry growth, the accessories market that improves and enhances the mobile experience have enjoyed the ride on their coattails. The iPad continues to lead the tablet market in sales, with shipments total of 22.9 million units, increase of 48%. The significant increase is reflected in the sales at ZAGG. iPad keyboard sales, a new ZAGG offering, increased 164% representing 28% of net sales. (The highest-margin product line, the invisibleSHIELD, sales represented 43% of net sales.)

Samsung experienced 263% year-on-year growth, shipping nearly 8 million combined Android and Windows 8 tablets during the quarter for a 15% market share, the same as the year previous.

ZAGG, and other accessory companies, also depend upon the success of the mobile phone and smartphone markets. According to a new report by Gartner, overall mobile phone sales were down 3%, but smartphone sales were up 47% year over year. 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 23% of mobile phone sales, while Nokia (NYSE: NOK) took third place of mobile phone sales with 19%. However, Nokia slipped from third place to seventh place in smartphone sales in the third quarter of 2012, with only 7.2 million smartphones sold. Worldwide smartphones sales are expected to continue to increase, but at a slower rate than years before as the market becomes saturated.

ZAGG diversified its product offerings last year with the acquisition of iFrogz, which helps it compete with Skullcandy (NASDAQ: SKUL) with headsets, earbuds, and mobile device cases. Skullcandy net sales in the fourth quarter increased 21% to $101 million up from $83.4 million in the same quarter of the prior year. North America net sales in the fourth quarter increased 12%, and international net sales in the fourth quarter increased 90%. Gross profit in the fourth quarter of 2012 increased almost 9% to $45 million from $42 million in the same quarter of the prior year. Gross margin was 45% in the fourth quarter of 2012 compared to 50% in the same quarter of the prior year.

ZAGG is not a guaranteed win or perfect stock. Things do look promising for the company as its primary markets continue to grow, and for the time being, numbers keep going up.

Erin McBride has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and SKULLCANDY INC. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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