Our interest in looking at ZAGG stems from some work we have done with Harris & Harris (NASDAQ:TINY) on nano-based coatings for electronic devices, a look into 3D accessories for consumer electronics made by Spatial View, and some work we did on Logitech (NASDAQ:LOGI) a few years ago before that one fell on hard times. So before looking at some future opportunities for ZAGG in nano-based coatings let's get a clear understanding of where it is now:
- ZAGG jumped on investor radar screens in 2010, after doubling revenue three years in a row and reaching a $100M run-rate with solid operating profits. The momentum continued in 2011 and more investors piled into ZAGG as a kind of derivative smartphone play. (ZAGG makes cases and protective materials for smartphones, tablet computers and laptops.)
- A key (negative) inflection point for the company and the stock occurred in June 2011, when ZAGG announced the purchase of iFrogz for $105M. Although the cost of the acquisition at 2x sales was certainly reasonable investors began to wonder about both sustainability of growth and worry about the integration risks that bedevil acquisitions, especially for young, rapidly growing companies.
- There is some major tension here - between the big decline in the stock price and the continuing confidence from management concerning forward guidance and longer-term aspirations of becoming a $1B company. The drama surrounding the eventual resolution has attracted quite a bit of attention.
- For many investors the memories of Logitech are still fairly vivid. As the closest comparable it enjoyed a similar growth phase from 2004 to 2007 and then has experienced consistent declines over the last four years. But Logitech still has a $1.35B market cap despite being "undervalued." With an enterprise value of just under $300M it's possible that ZAGG could "fail" and still have a much higher value in two or three years.
- Short sellers have discovered ZAGG and about 30% of the shares are sold short. Their enthusiasm is being stoked by sequentially declining gross margins at the company (50.4%, 45.8%, 42.5%), potential channel missteps/inventory adjustments and a business that has few barriers to entry.
- There is quite a dialog going on between supporters and detractors of the company and the management team. Rather than wade through it all we ask a simple question - is ZAGG a great company? Are its products fantastic?
- So far the answers are no and no. That doesn't mean it can't get better but today the products, especially outside of the simple stick-on shield, are of so-so engineering and poor quality. The products are far from inspired and not exceptionally well made.
- The shares do trade at a very low valuation based on reported numbers and our IV of $14 suggests meaningful upside if the company continues to execute and prove itself to be "real" and capable of reaching at least a $250M revenue run rate.