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Matt Jonza
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My investing style is continually evolving. I began picking stocks purely for Macro reasons, dabbled in momentum trading, then honed my inner-Graham and and focused on value-plays and turnarounds. Today, I would say that I am a medley of all of the above. I have learned quite a few lessons in my... More
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  • ZAGG: A Unique Way To Play The Apple Earnings Report

    The Superbowl of the investment community begins at 5 p.m. ET. On Wednesday, January 23rd. Whether you are a money manager, retail investor, or an average citizen it will be impossible to escape the chatter of how many millions of iPhone's and iPad's were sold in Apple's Q1. The whispers of Apple's demise and Samsung's accent have grown louder in recent weeks, as many analysts have revised their forecasts lower. Whether Apple sold 45 million or 50 million iPhone's will be an important leading indicator of where AAPL stock price is moving next, but there are a few commonly over-looked companies that in the weeks to follow will piggy back off this news. I am choosing to focus this article on ZAGG Inc.

    ZAGG a leading mobile device accessories and technology company with products that protect, personalize and enhance a consumer's mobile experience. ZAGG's product line focuses on iPhone's and iPad's, and therefore in recent years have been experiencing robust revenue growth. In 2010, revenue grew by 98% and in 2011 revenue grew by 135%. ZAGG Inc. concludes their 2012 Fiscal Year on February 25th, and analysts predict that revenue growth will begin to cool off to a 45% YoY. The slowdown in growth can be attributed to two main factors. First, market penetration in the US has nearly peaked. From Target to Best Buy, ZAGG products such as invisibleSHEILD are now carried by almost every major retailer. There aren't many avenues left in which ZAGG can expand it's customer base in the US. Second, ZAGG has been experiencing market saturation. As Apple products have been flying off the shelves at record paces in recent years, new cases and screen protectors have been filling up the aisle end caps just as rapidly. This will likely cause margin's to compress as the various accessory dealers compete for market share. It would be easy to argue that the combination of these factors makes ZAGG Inc. an unattractive investment, but to do so would mean failing to consider the big picture.

    With a P/E of 9.9 and a forward P/E of 7.86, ZAGG is already sporting a remarkably cheap valuation. P/E's at this level are at 5 year historical low's, and even if Q1 iPhone sales disappoint the investment community on Wednesday, I expect the stock price finish higher by this time next year. There are a variety of reasons why I believe this to be true, but I find it easiest to focus on the big picture. The IDC projects that smartphone shipments in 2012 grew 33.5% to 659.8 million units, and that growth will continue during that next four years at a rate of 18.6%. I expect that cell phone accessory companies will grow consistently in the next few years as the customer base continues to expand. ZAGG's most successful product is the invisibleSHEILD, which accounted for 51% of their revenue in Q3. Although a majority of the revenue comes from new iPhone sales, invisibleSHEILD is connected to the smartphone industry as a whole. ZAGG currently makes invisibleSHEILD for nearly every smartphone on the market. In the most recent conference call, management announced that invisibleSHEILD grew by 14% year-over-year.

    The second largest chunk of ZAGG's revenue comes from a much more exciting growth category: tablets. ZAGG is a leading manufacturer of keyboards for the iPad and other successful android tablets. Tablet sales growth in the past year can be classified as rampant, it doesn't look like they will be cooling off for quite awhile. The IDC raised its 2012 tablet shipments projection to 122.3 million in December, and they anticipate growth of 40.1% in 2013. By 2016, the IDC projects that there will be 282.7 million tablets shipped to retailers which is more than double the 2012 figure. While keyboards are not a necessity for any tablet owner, they are a luxury that I anticipate many people will want. Tablets are replacing laptops for many consumers, and even though auto-correct features continue to improve on the touch screens they will always be slower than a physical keyboard. ZAGG's keyboard sales have grown considerably; management reported YoY growth in Q3 of 300%. I expect this trend to continue in Q4 with Apple's release of the iPad mini and 4th generation iPad. If iPad sales figures on Wednesday beat estimates, I am willing to bet that ZAGG's keyboard sales will follow right alongside.

    Is ZAGG an attractive buy regardless of Apple's earnings? Probably not. Zagg's stock price is inherently tied to Apple's sales numbers. If less iPhones and iPads are sold than expected, ZAGG's growth projections going forward will be negatively impacted. But at the current share price of $7.62 the fundamentals do not support a large move downwards. ZAGG is 17.57% off the 52 week low, and 42.66% off of the high. From my perspective, some positive news from Tim Cook on Wednesday will send this stock soaring. ZAGG is well positioned for continued double digit revenue growth in the smartphone and tablet market, and deserves a serious look from investors. It isn't every day that you come across a company that sports revenue growth of 45% while maintaining a P/E of 9.9. There are many other factors that go into deciding whether a company is a worthy investment, so I encourage all of you out there to check out the competition and look into the recent departure of ZAGG's CEO Robert Pederson. But if you're looking at the big picture, I'd say the future is bright. Especially if Apple beats expectations on Wednesday… market stay tuned.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ZAGG over the next 72 hours.

    Tags: ZAGG, AAPL, Technology
    Jan 21 1:35 PM | Link | Comment!
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