It's that time of year again as
Apple Inc. (Nasdaq: AAPL)
prepares to showcase its new iPod models before the end-of-the-year
spending spree. The company announced yesterday that it would show
off a new iPod Touch with dual cameras before the holiday
But everyone knows about Apple. And I'm sure most Wall Street
firms even own shares of the company. I'm not too interested in
Apple's sales - but I am interested in the effect of Apple's sales
on the performance of a small company I've been following.
This micro-cap company has only two analysts following it so
most investors, including many big time Wall Street firms, are
unlikely to know about it. And if you can get into micro-caps
before major firms, you have the chance to beat the street.
***More people are purchasing iPods and smart-phones these days
as demand grows for mobile devices and their applications. When
somebody purchases an iPod for $199 or an iPad for $499, they are
making a relatively large investment. So these customers usually
make another relatively small purchase to protect their
Why? Because electronic devices can easily get scratched or
damaged - so customers want a protective film covering, or a case.
Think about it. If you're purchasing a new iPhone for $300, you'll
probably buy a protective covering for just $20 more to prevent
damage to the screen.
But this covering is no simple plastic. Originally, this film
covering was designed to protect the blades of military
helicopters. Later it was determined that it could also be used to
protect everyday electronic devices - like those made by Apple.
***There are just a few companies in this specialized industry,
and most are privately held. But there is one micro-cap company in
ZAGG Incorporated (Nasdaq: ZAGG)
makes protective coverings for electronic devices including iPods,
iPhones, iPads, and global positioning systems. The company is
headquartered in Salt Lake City, Utah.
If the trend toward mobile devices continues, as I believe it
will (and most research supports this position), soon the majority
of people with mobile devices will be flocking to ZAGG's products
to protect their investment. It could even be a takeover target,
although at this point that is pure speculation.
I think there's tremendous growth potential for this little
specialized industry, and ZAGG is posting pretty impressive
numbers. The company showed signs of strong growth after reporting
earnings for the second quarter of 2010.
ZAGG reported record revenue of $15.1 million, up 63 percent
from $9.2 million from the second quarter of 2009. I love young
companies that have strong revenue growth, especially one that has
a market cap of just $71 million.
The company brought in 66 percent of its revenue from indirect
wholesale channels, 23 percent from its website (this serves retail
customers), and 8 percent from its mall cart and kiosk business. If
the company can further diversify its revenue stream, it will be in
an even stronger position down the road.
ZAGG expects to see strong demand from its existing partners
Best Buy Co. (
. The company also added
AT&T Inc. (
as its newest channel partner. Robert G. Pedersen II, President and
CEO of ZAGG said this will be an
"...important relationship in our future growth strategy"
. The company launched the new distribution agreement with AT&T
in June in all corporate AT&T locations.
ZAGG's gross margin of over 50 percent should also perk
investors' interest. If competition within the industry increases,
the company has room to lower prices by decreasing its margins,
which could thus increase demand for its products.
Although there are a few competitors in the industry - including
two private companies, Power Support and SGP - I think demand for
ZAGG's protective coverings will stay strong. What's more, ZAGG
does not have any long-term debt, and has $6.4 million in cash on
***Although the story may be bright for the company, its stock
has been very volatile over the last two years. Over the last year
the stock moved significantly lower - but it seems to have found
support around $2.00 and has been moving higher since early summer.
The stock is up 43 percent since June 1.
ZAGG is expected to grow earnings by 67 percent this year and 36
percent in 2011. Revenue is expected to average around 30 percent
over the same period. This is a reasonably fast-growing company in
a strong industry, and while it has significant exposure to
discretionary spending, a potential weak spot in the economy, I
believe demand for mobile devices will continue to support strong
As always, I encourage you to do your own homework before
entering any positions.
What are your thoughts on this company and its industry? Please
send comments or questions to