[This was posted on the R2 blog a couple of days ago but SA didn't pick it up.]
A few weeks ago I had to visit Radio Shack to buy a car charger for my Droid phone. Of course, I have about a half dozen power adapters for my old Blackberry, but the Droid demands a different shape plug. Sound familiar?
The guy in the store suggested the iGo charger, which allows you to buy different tips to adapt it to just about any phone or device. At the time I didn’t care much since my goal was to get back in the car to drive down to NYC for a meeting and just needed my phone to work.
A couple of weeks later I noticed this rapidly moving micro-cap stock, iGo (NASDAQ: IGOI), and wondered how much potential the company has for more growth and if the stock might still be a good investment despite the huge recent gains.
First of all, iGo is a company in transition from power adapters for laptops to a broader line of accessories for mobile devices including phones and tablets. iGo also took a revenue hit a few quarters ago by making a change in their distribution model. Additionally, they are seeing a ramp down in their business with Radio Shack now that the Shack is making their own chargers, but experiencing rapid growth at Wal-Mart, which is expanding the number of its stores carrying iGo products. The company appears to have turned the corner and is now in a position to show more fundamental growth as Wal-Mart and other retail channels eclipse the reduction in business from Radio Shack.
The company also recently expanded into two new areas with acquisitions: Adapt Mobile in August of 2010 provides skins, cases and screen protectors for mobile devices; AERIAL7 was acquired in October 2010 and offers fashion-forward audio accessories. These acquisitions appear to fit well with the company strategy and were acquired at “tuck-in” prices. This is in contrast to companies like Logitech who have paid up for innovative companies like SlingBox and then done little to leverage them.
Lastly, the company has plans to better exploit their relatively large patent portfolio. Recently the company struck a deal with Texas Instruments (NASDAQ: TXN) for the joint development and marketing of a more energy-efficient chip for use in power chargers. The announcement of this deal drove the stock up quite a bit but the details of the deal are not available. So iGo could just be using TI for engineering help and production of the chip which would not necessarily have much business impact.
What we are left with is a fairly hard to model long-term business but one that appears to be fairly promising in a large market, and a stock with a $100M market capitalization, $30M in cash and no debt. This means that for now the shares are likely to trade based on technical factors and retail enthusiasm for how big it might be if management executes.
So I ran a few different scenarios to estimate the Intrinsic Valuation (IV) for iGo. The first model is the most straightforward with revenue growth of 15% and 6% operating margins by 2015. That results in an IV of $3 which is where the shares are trading today.
A more optimistic case allows for better gross margins driven by an improved product mix and/or exploitation of the IP portfolio. Higher operating margins (10%) generate a more attractive IV of $4.50 to $5 depending on revenue growth. It’s worth noting that comparable companies like Plantronics, Logitech, and Black Box have operating margins of 15%, 6.5% and 4.4% respectively.
Our conclusion regarding valuation is that the shares are probably now fairly valued but still have reasonable upside if the company can leverage their recent acquisitions and begin to forge a path to higher operating margins.
This isn’t an easy market to operate in. iGo is trying to use their patented “green” technology to differentiate their universal power adapters in the market. Kensington, Belkin and Targus are well-established competition in the marketplace and there are dozens of smaller no-name competitors. The company does appear to have something of an advantage today in the mobile phone charger space where most alternatives are manufacturer, one model only, solutions.
In audio, skins, cases and screen protectors the company will face a range of very fragmented competition. In some cases very large players like 3M are in the market but only for one thing (screen protectors.) So there may be an opportunity for iGo to simplify the line of products for a large retailer who right now has to carry many different brands to meet demand for adapters, audio, and protection accessories.
The management team appears to be pretty solid and the board is so-so (laundromats, Phoenix Suns and HP). Thankfully, the execution requirements are not complex. This is straight ahead business growth at this point.
Shares of iGo have tripled in the past year and if the actions of the CEO and CFO are any indication, the shares may be due for a pullback. The CEO bought consistently in 2009 at prices around 60c/share. Since the shares crossed $2 both officers, especially the CEO, have been selling shares regularly and in larger amounts. To be fair, the CEO still owns over 1M shares but unloading 200k in the last few weeks after the announcement with TI – in which no details were made available – is a little worrisome.
All in all, iGo remains an interesting derivative small company play on mobile computing. Accessories may not be glamorous but they still represent a meaningful market. Both Logitech and Plantronics have built meaningful businesses on the fringes with PC and phone accessories, respectively. It’s not out of the question that iGo could use the same playbook and do something similar.
[Disclosure: The author holds a small long position in IGOI at the time of this writing.]Related articles
- iGo Unveils Dual-USB Chargers for Convenient Charging of Multiple Electronic Devices at Once (eon.businesswire.com)
- iGo Named as CES Innovations 2011 Design and Engineering Award Honoree (eon.businesswire.com)
Disclosure: Long shares of IGOI at the time of writing.