Almost every stock headed higher during Wednesday’s massive rally.
One of the handful of stocks that found itself underwater was Skullcandy (NASDAQ:SKUL) — a developer of headphones and accessories for Apple (NASDAQ:AAPL) iPhones and other mobile devices that was getting banged up by about 12% in late afternoon trading, continuing a 65% decline since its 2011 IPO.
Jefferies (NYSE:JEF) analyst Randal Konik just published a brutal report on Skullcandy. He dropped his “buy” rating to an “underperform” and noted that competition in the in-ear category (headphones), which represents more than 60% of SKUL’s revenues, is becoming a huge problem.
For example, Apple’s reveal of the iPhone 5 also ushered in the company’s “EarPods,” an upgrade from its traditional earbuds (note: SKUL shares are down more than 20% since that announcement). Then there are increasingly popular offerings from many other companies, including Beats by Dre, Incase, Urbanears, Soul by Ludacris, SMS Radio, Sony (NYSE:SNE), JVC and Bose. Even Adidas (PINK:ADDYY) has recently entered the market.
But perhaps the biggest issue for Skullcandy is that, while it’s in the business of tech devices, the company actually is a fashion play of sorts — and that’s damning considering consumers’ fickle nature. In fact, Skullcandy pointed this out in its S-1 for its IPO:
“Our success depends largely on our ability to anticipate, gauge and respond to changing consumer preferences and trends in a timely manner, while preserving and strengthening the perception and authenticity of our brand. We must continue to develop innovative, trend-setting and stylish products that provide better design and performance attributes than the products of our competitors.”
No easy feat. And unfortunately, Skullcandy’s retail strategy may be muting the coolness of its products. While products are sold at more fashionable retailers like Tilly’s (NYSE:TLYS), Target (NYSE:TGT) and Best Buy (NYSE:BBY) also accounted for a total of 20% of net sales.
These are not the places hipsters look to for cutting-edge products.
The valuation for Skullcandy is attractive, with the shares trading at a mere 7 times earnings. However, profits could come under pressure over the next few quarters amid intensifying competition. Thus, it’s very likely SKUL shares could be dead money for some time.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.