The Real Truth Concerning ZAGG: Post-Earnings Analysis

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 |  About: ZAGG Inc (ZAGG), Includes: AAPL, BBY, TGT, WMT
by: Rupert Nicholson

After the close Thursday, ZAGG (NASDAQ:ZAGG) reported first quarter consolidated revenue of $55.5 million, GAAP diluted earnings of $0.16 per share, adjusted EBITDA of $14.4 million, cash and cash equivalents of $16.9 million, a gross margin of 48%, and cash flow from operations of over $14 million. Furthermore, changes from quarter 2011 include and increase of consolidated revenue of 106%, and adjusted EBITDA increase of 166%. These financials are all very healthy and show that ZAGG is poised to become an important player in the wider economy over the next couple of years. Its financials have benefited, and will continue to benefit, from the continued rise of Apple (NASDAQ:AAPL) as the number one tablet maker, and one of the premier phone makers.

I would also like to focus on two other very important developments which are guaranteed to help ZAGG's rapid growth over the coming years. The two developments are the huge decrease in ZAGG's debt and the expansion of product channels by recently signing a deal with Wal-Mart (NYSE:WMT) along with similar deals with Target (NYSE:TGT) and Sam's Club. The tackling of its debt shows a responsibility most new firms do not usually show. This further proves the reliability and strength of the management of ZAGG.

Good management is something consistently undervalued in companies these days. In relation to the deals, ZAGG confirmed the deal with Walmart in its earnings call after its earnings released today. Its variety of platforms for its products prove it is serious about expanding and taking advantage of the rapidly growing market for Apple products and consequently good cases to use with those products. Furthermore, it portrays the management in a good light as well, because they are ensuring the future prosperity of the company. This is something which should encourage shareholders.

Every quarter since its incorporation, ZAGG has met and beat expectations, which should be a sign for the price per share to rise more significantly then it has. However, shorts on the stock are keeping the price per share down using false claims portrayed as genuine articles. These articles have used unfounded evidence to suggest the management are lying about revenue and revenue predictions. This has led to ZAGG being consistently undervalued. ZAGG has an extremely high short interest of in excess of 30%, nonetheless, good news could harness this high short interest pushing up the stock by 20% or 30% on Friday due to a stock squeeze.

A short squeeze is when individuals holding short positions are typically forced to purchase shares in situations where the price increases rapidly, in order to exit their short position. Since Zagg has a high short interest, any big investors coming in, on great news, earnings in this case, will cause the share price of ZAGG to increase, shorts will start to cover their short position, and cause the share price to appreciate rapidly. So, if ZAGG starts to rise rapidly, the trend should continue to escalate because the short sellers will likely want out. For example, if the stock rose 15% tomorrow, those with short positions would be forced to liquidate and cover their position by purchasing the stock. If enough short sellers buy back into ZAGG, the price is pushed even higher.

It is also well worth addressing recent articles that have taken the spotlight regarding ZAGG. It is very interesting how much one Seeking Alpha post in the morning on May 3rd could have a large impact on the price per share of ZAGG. The stock dropped 14.1% based on some accusations he leveled against the management of ZAGG, such as reporting revenues of $80 million, when according to him, the 'real' figure was in fact much lower based on analysis of talking to 5 managers from Best Buy. Only talking to 5 managers from one of the chains ZAGG's products are marketed in suggest a huge standard deviation which could put revenues much higher than $80 million or much lower. Please bear in mind the CEO and CFO are personally liable for any fraud they commit. It is also worth mentioning that ZAGG's auditors are KPMG, a very reliable auditing company. Consequently, implying that they would lie about the financials is almost as ludicrous as implying the CEO and CFO would engage in a fraud scandal. Also, the analysis of this supposed fraud was conducted by talking to 5 Best Buy (NYSE:BBY) managers hardly conclusive evidence. Therefore, even after post-earnings rises, the stock is still down heavily on its Wednesday closing price.

Looking towards the future, Zagg Inc reiterated its guidance for fiscal 2012 revenue in excess of $250 million and adjusted EBITDA of $55 million to $60 million. It is also expanding its revenue streams by reaching out and signing deals with the big retail players in the US markets. Therefore, their future growth looks secure as well.

With a strong management team going forward, at this value, ZAGG looks like a dream come true. It is a small stock with high growth potential and more importantly seems to be undervalued at current prices. It has valuable patented products such as the invisibleSHIELD and is in the process of developing a strong brand imagine.

Significant credit for this article must go to resupharm as he gave me the idea and has provided me with some of the information included in this article. Thank you very much.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.