Back in 2003, Rick Alden was listening to his portable music player while on a chairlift in Park City, Utah. It was at that moment that he hatched the idea for premium headphones for those who liked extreme sports. He wasted little time and started up Skullcandy (NASDAQ:SKUL).
It was definitely a smart move — the company priced its IPO late Tuesday at $20, above its $17-$19 expected price range, giving it a valuation of $189 million. In Wednesday’s trading, the shares were up nearly 10% to $21.90.
Despite persistent unemployment in the U.S., Skullcandy seems to have little trouble finding customers willing to pay $100 to $200 for headphones. So, it should be no surprise that investors are interested.
But could there be problems? Let’s take a look at the pros and cons:
Lifestyle brand. Skullcandy’s brand combines music, fashion and active sports. The company’s motto is “Every revolution needs a soundtrack.”
Interestingly enough, the brand has been able to expand out of its niche. From 2006 to 2010, sales have surged from $9.1 million to $160.6 million. What’s more, the company generates lots of cash. Last year, its pretax profit was $39 million.
Innovation. Skullcandy is laser-focused on understanding its market and developing great products. This includes attention to details like colors and even packaging. Yes, it’s similar to the Apple (Nasdaq:AAPL) approach to design.
Skullcandy has also been adept at getting adoption from celebrity influencers like snowboarder Danny Kass and rapper Snoop Dogg.
Mobile mega trend. As seen with Apple’s latest earnings report, there seems to be no end to the demand for its products. And this is driving growth for accessories.
According to research from IDC, the worldwide market for smartphone shipments is expected to grow at an annual rate of 24% from 2010 to 2014.
Fads. It is never easy to sustain the popularity of a cutting-edge brand. After all, consumers can be fickle, especially when it comes to lifestyle products.
There are some signs that Skullcandy could get oversaturated. Keep in mind that it is already available in mainstream retailers like Best Buy (NYSE:BBY), Target (NYSE:TGT), Dick’s Sporting Goods (NYSE:DKS) and AT&T (NYSE:T).
Competition. The lifestyle space is crowded. There are major players like Adidas and Nike (NYSE:NKE). But there are also fast-growing operators, such as Beats by Dr. Dre and Nixon. And no doubt, there are likely to be new entrants.
Product concentration. While Skullcandy has been diversifying its product mix, the fact remains that 89.2% of revenue comes from headphone sales. Thus, the company is vulnerable if there is a falloff in this segment.
Skullcandy has certainly built a strong brand and distribution platform. While there is lots more growth in the U.S., the big opportunity is in international markets. The IPO should help with these efforts.
In fact, over the next 24 months, Skullcandy plans to launch more than 10 new premium headphones. Thus, there is likely to be much momentum on the top line.
For investors looking for a lifestyle play, Skullcandy is certainly a good pick. Yet there should be some caution — IPOs are often highly volatile within the first few months. Thus, it is probably better to wait for the stock to find a trading range before jumping in.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.