ZAGG: Market Leader, Breakthrough Product

ZAGG (ZAGG.OB) is a young company with a breakthrough product called the invisibleSHIELD. The invisibleSHIELD is a patented protective‐film covering designed for Apple’s (AAPL) iPod product line, RIMM’s (RIMM) Blackberry, laptops, hundreds of other cell phones, digital cameras, and gaming devices. What makes ZAGG’s product so unique, as well as the market leader, is the technology behind the film. The technology was originally developed by the U.S. military to protect the outer edges of helicopter blades from high‐speed damage.

ZAGG has a 10 year licensing agreement with the company that acquired the rights to this technology from the U.S. military. In a mere three years, ZAGG has become the dominant force in the screen protector sub-sector. While competitors offer multiple screen protectors at lower price points, ZAGG provides a lifetime guarantee for their product. ZAGG’s invisibleSHIELD is the most durable, scratch-resistant product on the market. In a strength test on YouTube (GOOG), a sheet of the invisibleSHIELD was able to successfully hold 1,000 lbs. of weight. Check out the YouTube clips of the strength and scratch tests.

Four years ago, ZAGG did not exist. In late March, ZAGG reported $19.79 million in revenues and earnings of 11 cents a share for 2008. This is up from 2007 revenues of just under $5.14 million. More importantly, this growth is set to continue in 2009 and 2010. The one analyst following ZAGG, Marcus Robbins, has ZAGG’s revenues doubling this year to $40 million and then ramping to $71 million in 2010. Earnings are expected to double to $.21 cents a share in 2009 and then go up 85% in 2010 to $.38 cents a share. ZAGG seems very cheap based on 2010 numbers.

After years of selling the invisibleSHIELD via their website, franchised mall carts, and a number of worldwide distributors, ZAGG scored a coup when two of world’s biggest electronics distributors began stocking invisibleSHIELD in the middle of last year. I am talking about Best Buy (BBY) and The Carphone Warehouse (CPW), a European Best Buy‐equivalent with 2,700 stores. The relationship with Best Buy has been a huge success for ZAGG and has been a big driver for its growth.

Wholesale Distributors now make up almost 50% of ZAGG’s revenue, up from 13% in Q2 of last year. Recently, ZAGG announced two additional big-box retailers that will begin stocking the invisibleSHIELD in Q2 of this year, opening the door for additional sales as new consumers learn about this innovative product.

Currently, the leading competitors to the invisibleSHIELD are the original hard cases that jump‐started the cottage industry of protective coverings for electronic devices. While they still enjoy some popularity, when you consider that aesthetics are indeed a driving force behind the purchase of many devices – think iPhone – then you can quickly see how a see‐through, form‐fitting invisibleSHIELD would be a more attractive alternative to clunky hard case. Thus, I think ZAGG will continue to make inroads in forging a new subsector of the protective case market.

Digital Lifestyle Outfitters (DLO) is a company that sells the second best screen protector product. However, the shields come 5 to‐a‐pack and you are obliged to replace them every 3‐4 months, after they peel off or scratch excessively. Additionally, DLO products do not include a life‐time guarantee.

The only disadvantage I can observe thus far with the invisibleSHIELD is that the application does require some patience and can be tricky to fit on the device properly the first time. However, I personally own one and I have experienced no problems for the past few months, even after submitting it to a rigorous scratch test.

While the stock is extended in the short term, I expect further upside. Of note, management owns almost 40% of the stock and has yet to sell a single share, even as the stock has broken out to all-time highs. Management plans to list the stock on the Nasdaq as soon as the stock gets to $4 later this year. This will be a very significant catalyst for the shares as institutional money that has heretofore been restricted from buying into ZAGG because of its Bulletin Board listing will now finally be able to enter the name.

For those with patience and some tolerance for risk, ZAGG seems to offer considerable upside from these levels. Q1 earnings will be released in mid-May.

Disclosure: I own ZAGG for my accounts and the accounts I oversee.

Comments

[JamesApple:]

ZAGG is great for iPod/iPhone, but it makes little sense on the blackberry with its quirky QWERTY.

Apr 30 01:00 PM

[Nathaniel C:]

Thanks for the article. It seems like an interesting small cap with good potential.

Apr 30 03:52 PM

[EugeneD:]

zagg also has a lot of competitors.

Bestskinsever/Protechy...

But, if they can outperform their competitors, getting their hand in more retail stores. They should thrive.

Apr 30 10:40 PM

[john1940:]

Just one opinion, but I bought the cover for the iphone and could not install it. It was sticky, messy, and harder to install than advertised. It's also expensive and mine went straight to the wastebasket after I got it off. Goodbye $80.

May 01 10:04 AM

[Lawrence J....:]

Should we expect to see sales/installation kiosks at malls or expansion to other surfaces (e.g., vehicles)? Would either be economic?

May 04 08:31 AM

[SherriG0225:]

I personally use ZAGG's invisibleSHIELD on my Blackberry. It was not hard to apply and has never scratched. I recommend then to everyone who likes their electronics. My husband has one on his HTC Touch as well and the touch screen still works perfect despite the protective film.

May 04 10:54 AM

[User 415072:]

I installed the invisible shield on my Iphone (and my wifes) and it was very easy - the corners never lift up like the other covers and it has the best texture when handling the phone.( never slips out of hands )

May 16 07:19 PM

[The Inflect...:]

Have sold out of entire position in ZAGG with stock in danger of breaking its 50 day and on the heels of MDB Capital downgrade last week.

Jul 27 04:40 PM