2001 | 2002 | ||||||
Price: | 22.60 | EPS | |||||
Shares Out. (in M): | 0 | P/E | |||||
Market Cap (in $M): | 482 | P/FCF | |||||
Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
TEV (in $M): | 0 | TEV/EBIT |
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# | AUTHOR DATE SUBJECT |
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34 | |
hxf82, still following this name? The CEO stepped down. Sign of things to come? | |
33 | |
roc, it is hard to say what is tied to the iPad. But you bring up an interesting point that I have been wrestling with myself: Is ZAGG a smartphone play or an iPhone play? If ZAGG is a broad smartphone play, then I think we saw the first big cracks in their growth story last quarter as their largest customer Best Buy grew only 12% Y on Y and I would further note that BBY accounts receivable appear to be a very hefty 122 DSOs. To me this implies that either they stuffed the BBY channel at the end of the quarter to make their number or Best Buy is not paying for a lot of the ZAGG producs that have been shipped and are on their shelves. I have visited a couple of Best Buys lately and while iPhone SKUs are undoubtedly the best selling products, BBY is carrying racks full of InvisibleShields for seemingly every smarthpone and tablet in the store. By my rough count iPhone and iPad SKUs are probably 15% or so of the actual units at stores (although they probably sell through and are restocked faster). To me if Q3 smartphone sales were strong overall (but weak for the iPhone) this says that the third quarter should have continued to show strong growth. I think there is a high risk of a bunch of obsolete inventory at BBY stores for Acer tablets, LG phones, Blackberries etc. My checks indicate relatively few InvisibleShields are stocked at a lot of the iPhone channels like AT&T, Sprint and Verizon stores. That said, the Best Buy salespeople have told me that the shields sell well for all their phones.
If the non-iPhone units are mainly for show and only a very small part of the BBY revenue, and the business is majority tied to the iPhone, then it should bounce back with iPhone sales this quarter. But it would seem to be at least somewhat offset by weaker sales of all their other SKUs (probably at least 20) at BBY.
Any other opinions? | |
32 | |
Does anyone know what % of Zagg's business is tied to the iPad? If it is small, wouldn't the iPhone 4s shipping in October and Apple's q/q decline in iPhone shipments in 3Q explain Zagg's non-iFrogz revenue being down q/q in 3Q? And if that's true, wouldn't expectations for iPhone shipments almost doubling q/q in 4Q mean that Zagg could easily beat its 4Q revenue guidance? I get all the long term arguments against this one and it is one of only 30 companies on my quant short screen, but I want to get the timing right with a borrow rate of 42%. Is there evidence of impending margin pressure (besides margins being impacted by iFrogz)? Thoughts? | |
31 | |
Zagg had upside in revenue and EBITDA for 3Q and 4Q guidance was higher. However, I would have expected a stronger 3Q if the underlying business trends were strong. Indeed, pro forma revenue was down 15% q/q in 3Q (not discussed on the call that I heard). It is not usually down q/q in 3Q as you point out.
iPhone shipments were down about 15% q/q at Apple, about the same as Zagg's 14% q/q decline in legacy Zagg revenue. You point out that combined with the iPad, Apple units were down slightly. Do you know what proportion of Zagg's business is tied to the iPad? Maybe not much? I was wondering if iPhone shipments being down q/q in 3Q at Apple might have pressured Zagg's Q3? If so, will the big expected increase q/q in 4Q iPhone shipments (I saw one analyst had 17m in 3Q going to 30m in 4Q) mean a stronger 4Q than expected for ZAGG?
Here's another negative for you... Zagg's online business was down 30% q/q and was 13% of revenue. This is after they said this on the 2Q call: ZAGG.COM IS NOW ONE OF THE TOP 250 US RETAIL WEBSITES AND NOW BY CARRYING IFROGZ, WE CAN FURTHER CAPITALIZE ON OUR WEBSITE TRAFFIC. ZAGG.COM WILL CONTINUE TO GENERATE STRONG GROWTH FOR THE REMAINDER OF THIS YEAR. AND THE ADDITION OF IFROGZ WILL HELP US IN MEETING ONE IMPORTANT ELEMENT IN OUR GROWTH STRATEGY, MAINTAINING ONLINE SALES AT 15% OR MORE OF TOTAL REVENUE, EVEN AS OUR WHOLESALE REVENUE CONTINUES TO GROW.
Don't get me wrong, like I wrote, I think this is an obvious long term short. But usually it doesn't pay to be short a high beta, high short interest stock when the company is going to beat and guide up, which they did. | |
30 | |
So much for the better entry point. It seems like growth is kind of stalling out- I estimate that outside of iFrogz ZAGG was down Q on Q, which was not the case last year. In non-Best Buy channels outside of iFrogz revenue was down quite a bit. Combined iPhone and iPad units were down slightly sequentially in September, but organically ZAGG seemed to be down a lot more.
On the plus side they seemed to generate a little cash which somewhat undercuts the argument it is an accounting fraud. Gross margin looked good if you believe their adjustments. But that doesn't matter too much if people are wising up to the fact that the InvisibleShield is a worse-than-useless waste of money.
Any other thoughts? | |
29 | |
mm202,
I think ZAGG could top conensus revenue for 2H11 by a substantial amount. See the pro forma disclosures. There are some 2011 EBITDA disclosures in the term loan agreement that make me not want to short this thing before the call either.
This is an obvious long term short, but it seems like we'll get a better entry point after the call on Monday.
-roc | |
28 | |
I'd love to hear your current thoughts here. have you reshorted what you previously covered much lower? Do you still think it's as good a short as you initially did?
TIA
MM | |
27 | |
I don't know anything more about iFrogs than what they said in the call, but I wonder if anyone knows what this is about? My first thought, since they're both Utah companies, is that maybe there's a family connection or something like that, but management said they first met at a trade show. If they're really cleaning up an accounting mess, why would they want to do a deal like this now? | |
26 | |
http://finance.yahoo.com/news/ZAGG-Distributing-Through-New-bw-4078775064.html?x=0&.v=1 "Not only will Sprint not comment in this press release, if we mention them by name they will sue us. GO ZAGG!" | |
25 | |
thoughts on the 10-K announcement? | |
22 | |
This was really strange after hours, with the stock down as much as 20% before the cc...
-They first announced at 4:30 that their audit chair left and was replaced by some other director not saying why.
-Then they delayed their CC from 5pm to 6pm supposedly because of technical difficulties.
-Then on the call they say "we're grateful to kpmg and etc for getting these AUDITED financials done" where the press release with results at 5:45 clearly says they are UNaudited and they are not finished and due by March 31 and it could change, which is ALSO not true because they file as an accelerated filer which means they are due by March 15
- They described the director resignation/replacement as this weird related party thing that made no sense to me: supposedly a product they were making "Zaggbox" was doing business with some related party the director owned so they took the unit and sort of spun it off so the director owns the entire unit and the company is left with an interest bearing note (sounded sort of like seller financing "collateralized note"). They also made it sound like KPMG had approved of this by saying that KPMG had approved that the loan (from the former director to Zagg I guess?) was properly collateralized and was interest bearing. It was a pretty ridiculous statement - "KPMG has approved that this loan is interest bearing, therefor it fits the definition of a loan" = STAMP OF APPROVAL! BAM!
Otherwise their inventories soared again to be only ~3 turns/year on high growth and they had negative cash flow and got a $20M credit line against their receivables. So will they get a clean 10K?? It seems unlikely and seems certain there will be a NT 10K filed tomorrow since they, despite what they said on the CC, are an accelerated filer... | |
21 | |
This is a fascinating one. I don't have a dog in this fight right now but I am going to the Roth conference next week and have a meeting with them on Wednesday morning. Would they show their face at a conference after dropping a bombshell on Monday or do you think this is a sign they think the fourth quarter is fine and KPMG is not going to raise a fuss? I guess they could always cancel at the last minute. | |
19 | |
I didn't even expect this - the design by apple is pretty clever...
This seems like the beginning of capitulation - this must be an event to shake the momo sponsorship out and kills a lot of the growth story even aside from likely inventory write down. Seems like worth $5 maybe with accurate accouting, $1-2 if hxf is right about the inventory overstatement and KPMG kicks them in 2 weeks. | |
18 | |
How big is APPL covers for ZAGG? | |
17 | |
When you're a serf in someone else's ecosystem, you run the risk of the lord coming out one day and banishing you from the land.
Nice call on this one hxf. | |
16 | |
Apparently introducing their own covers. Ouch. | |
13 | |
hxf82, great writeup. Could you comment on the heated exchange in the seeking alpha link posted by vfm343?
The invisibleShield product does seem to be losing relevance; however, I have seen some of ZAGG's other products and they aren't half bad (e.g. ZaggMate - http://www.zagg.com/accessories/zaggmate-ipad-case). Also, the deteriorating metrics in A/R and inventory are definitely a red flag, but they could potentially be consistent with a fast growing company where volumes are exploding, no? I can't argue with the inventory stuffing or obsolescence claims (which is the heart of the short thesis), and clearly the management history is a good indicator that you are spot on in identifying a potential terminal short. I guess my only concern is that they have diversified their product base and the investments in working capital and ballooning inventory have been in other categories that might end up having descent margins / sell-throughs?
Just playing devils advocate here. Without question very interesting writeup. Congrats.
| |
12 | |
Actually a big part of the thesis is that the number of SKUs at Best Buy has decreased in the last few months, they stopped carrying their "full body" shields - which include little film strips for the sides and back of the phone and now only carry the screen shield (which is what everyone else makes too). I've heard this from other investigators and also from checking the website the full body shields aren't in stock anymore... | |
11 | |
I'd like to suggest another "except" to the bearish case - not that I am bullish on the company, I'm just saying there is another risk factor. In the 1990s I made a lot of money with a similar company, now defunct, called Recoton, a more than 20 bagger from 1990 to 1994, and ultimately even higher in 1998. You can still pull up charts, news and data on it on Bloomberg under RCOTQ. Like Zagg it also had a line of minor accessories, the kind of stuff you could buy in Radio Shack, and I don't think they offered anything special in terms of proprietary technology or value. But one thing the company was good at was building its relationship with customers, the biggest of which were Circuit City (bigger than Best Buy at the time) and Best Buy. These chains started out buying just a few things from RCOT and then discovered it was easy to order more and more things from one source and have just one truck pull up at a store every day with new inventory, not ten trucks from ten different vendors. RCOT acquired numerous brand names in speakers, antennas, and other gizmos and distributed them all, with the customers happy to get them all from one place. One of the things they liked is that if they overbought on product X, RCOT would let them return it and get a credit they could use to buy more of product Y; smaller suppliers lacked the broad enough line to make that option attractive. And, if I recall, sometimes you would see big jumps in inventory which would be a prelude not to trouble but to a big jump in sales the next quarter. You may be right in everything you say about Zagg's product line, but if BBY feels it is getting especially good service from them and wants to add more products, the short isn't going to work until BBY stops growing the line. Again, I have no reason to think BBY loves Zagg over other vendors, just that it is something you should try to check. | |
10 | |
I keep digging into this and except for some reasons at the end (and maybe more) it's looking like one of the most compelling shorts I've ever seen (that said I'm relatively new to shorting but have spend way too much time - thank you China - looking at fraudulent accounting this last year).
So in order of credit / benefit of the doubt given to the company:
-It's at 30X reported earnings thanks to obvious mo-mo sponsorship, so not cheap to begin with, they're growing, but...
-Their primary product (screen cover) clearly has less value now vs a year ago pre-Gorrilla Glass.
-Mgmt backgrounds wouldn't seem to indicate a track record of adapting companies to changing circumstances, Netflix style (short =ugh...), but rather just nosediving.
-Their inventory turns have gone from 6x/year in 2009 down to 2x/year last Q so:
---At a minimum they are terrible at inventory managment (which is not THAT hard, so implies other cockroaches)
---Almost certainly they will need to write down a lot of inventory with the new audit and along with it their old profits (to zero)
---Seems even more likely there is outright fraud and the inventory just isn't there and SEC investigation occurs...
So worst case (to a short) is that you are shorting an overvalued growing business with inventory-inept management in a longer term dying business.
The only "excepts" are:
-Why haven't the insiders sold even more shares, given the imminecy of the exposee from KPMG?
-Will the retailers like Best Buy be able to sell enough of their overpriced products because they capture so much margin on each sale (extended warranty style)? | |
9 | |
Can somebody please get Mitt Romney on the line? Joseph Smith would be proud. | |
1 | |
How can you short a company that has MC Hammer promote a product on Oprah??
But seriously, why May over August? May $5 puts look to be about $0.25, but they seem to have a high likelyhood of a 100% loss to me.
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