Money McBags will get his daily market update out later today, but he got a bit verbose with a small cap name this morning so will pump that out here in a separate post.  The company he is talking about is ZAGG and it has caught Money McBags’ attention again as it has been moving up over the last few days despite a market more pissawful than a halitosis sufferer’s breath after a “shower” with R. Kelly.  Money McBags told you ZAGG was a short way back in January and it has done nothing but fall until recently.  The company was up 10% yesterday on news that their new Zagg InvisibleShield Dry will be available at all AT&T stores for customers to walk past and not buy.  Here’s the deal, this company sells an overpriced commodity product that takes way too fucking long to apply and they don’t even own the patent on the materials that go in to it.  What they sell is a plastic wrap that goes over your iPhone, blackberry, Xbox, nutsack, to keep it from getting scratched or damaged.  It’s a nice product to have but it takes a day to fully adhere to your device and one needs to be a PhD in putting shit together to apply the Shield.  And it’s not just that, but the company is selling these things for $25 a pop when there are cheaper and easier to apply alternatives out there ranging from fewer than $10 for this kind of stuff  to free for simply not being a dipshit and putting your iPhone in a different fucking pocket from your keys.  And let me touch on one point Money McBags previously mentioned, they don’t actually own the patent on the materials that go in to the Shields, they merely have exclusive marketing rights and Money Mcbags is pretty sure that if this were a real business opportunuty, Apple would out negotiate Zagg for those exclusive marketing rights and sell the product themselves.

Anyway, ZAGG’s new dry product is supposed to be easier to apply unless you google it and find that it is still the same pain in the ass for people to put on their PDAs (and Money McBags would love to put on some PDA with Sara Underwood who would certainly look delightful under his wood).  Some of the recent stock movement up was the company being moved to the Russell Microcap Index last week and the rest is purely a way for shorts to once again make money.  Not only is this company a one product company whose other ventures have yet to really add anything (this was their big new idea business venture a few Qs ago whose failure is as surprising as findng out that Chris Henry had brain dammage or Robert Byrd died), but their earnings keep getting worse.  While revenue in Q1 grew 8%, net income fell from $1MM to $800k dropping eps from $.05 to $0.03 because gross margins sunk by 800bps as they had to move in to the more expensive whoesale channel from the cheaper internet channel where their margins are obviously lower on the overpriced commodity product they sell.  Oh yeah, there’s also this which is the one fucking thing about this company which Money McBags doesn’t understand (other than who would buy their product) and would love for someone to explain to him (though if you could use small words and lots of pictures, he’d be happy), their invoiced shipping costs were $267k and the actual cost to them for shipping was ~$1MM.  So they lost $750k on shipping?  Pardonnez-moi, s’il vous fucking plait?  How the fuck does that happen?  Is this an industry norm (and really it may be) as it seems more bizarre than sell side economics or the popularity of that Twilight thing.

The company earned $.14 per share last year but in the past 2 quarters, despite revenue growth, has only earned $.04 and that includes their supposedly biggest Q that ends in December which saw costs ramp up faster than Nouriel Roubini’s heartbeat when spelling “double dip recession”.  So one could annualize the $.03 from Q1 and say the company will earn $.12 (even though Q4 should not perform like the other Qs), but that is sort of the easy way out.  The problem is, there are three huge unknowns with this company:

1.  How low will gross margins fall?  Last Q1 they were 64% with the wholesale channel accounting for 45% of sales and the internet channel accountng for 45% of sales.  This Q1 they were 56% with wholesale accounting for 62% of sales and the internet accounting for only 22% of sales.  So how much more does this mix skew?

2.  Is this really a growth company anymore?  Revenue grew 8% last q.  Excuse me while I yawn myself to fucking death.  The growth story is that as iPhones grow, so will ZAGG, and while Money McBags may not be as smart as Stephen Hawking (though he is certainly far more mobile and verbally melodic), it doesn’t take a nuclear scientist to realize the iPhone has been growing like a fucking steroidal weed while ZAGG’s sales only grew 8%.  iPhone sales were up more than 100% last Q and all smart phone sales were up 50% and yet ZAGG grew by fewer than 10%.  Growth story, de-mythed.

3.  What the fuck are they going to fail at next?  First it was the ear buds that no one cared about, then it was the appstore which has revolutionized the app business like the Edsel revoutionized the car market, and next the CEO has been talking about ZAGG stores which are not just likely to be expensive, but complete busts as selling dinky plastic coverings for PDAs are not enough to pay the rent (unless the store is located in Detroit where businesses can operate rent free, though they are also sales free).

The Merriman Curhan Ford analyst somehow thinks this stock is worth $5 to $6 but there’s a reason that analyst works for Merriman and not a reputable organization like WGP.  Seriously, to get to a $5 valuation, you have to think this company can earn $.25 a share and trade at 20x and the company can do that if they grow revenue by 25% while keeping margins flat (and as mentioned, margins have been falling faster than Larry Craig’s shorts at a gay pride parade), so Money McBags guesses it is possible, but if anything, that growth will take until 2011 and why would you put a 20x multiple on a company that will take 2 years to grow revenues 25%?  What is more likely is that this one product company continues on with single digit growth and decreasing margins and maybe, maybe, squeaks out $.10 to $.15 in eps this year and Money McBags wouldn’t pay anything more than 14x for that which gives us a target price of $1.40 to $2.10.  The company may be too small to short or to even give a fuck about, but Money McBags would rather be long Afghanistan than long ZAGG.

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