Tiny Zagg Inc (NASDAQ:ZAGG) is on a roll thanks to Pokemon Go players’ need for portable smartphone chargers, but performance chasing a micro-cap amid an ocean of competition is probably not a good idea.
Zagg offers everything from screen protectors to keyboards, but it’s the company’s Power Amp line of battery packs and Mophie battery cases that have analysts and investors interested. After all, Pokemon Go isn’t just runaway hit the likes of which we’ve never seen before, it’s a battery hog.
ZAGG stock added more than 4% in morning trading Tuesday, piling up a strong run of recent gains. Indeed, shares are up more than 35% since shares tied their 52-week closing low at the end of June.
But that doesn’t mean these kind of gains are sustainable. The rally in ZAGG stock is predicated far more on a trade than it is on fundamentals by now. At some point, someone is going to pull out and take profits.
Consider that prior to the rally, shares were off about 55% for the year-to-date and close to 70% over the past five years. If memory serves, the last half-decade has been one of explosive growth for smartphones.
Besides, even if ZAGG gets a big boost out of Pokemon Go demand, it has surely been baked into the stock by now.
ZAGG Stock Overshoots the Mark
The proximate cause for ZAGG stock’s second leg up was a research note by Roth Capital. Analyst Dave King figures that demand driven by Pokemon Go could generate a 15% jump in profits.
That’s appealing, but it doesn’t really justify a 35% improvement in the company’s market capitalization. (Be forewarned that with a market cap of only about $200 million, ZAGG is a micro-cap stock, which is volatile by definition.) And it’s not like the analyst is banging the drum on this name.
Roth rates shares only at “Neutral” (hold, essentially). True, he lifted his target price to $6 from $5, but ZAGG now trades well above that level, suggesting that it is significantly overpriced.
Finally, it’s important to realize that there is an absolute glut of portable charging devices. It’s a battery, people. It couldn’t be more commoditized. Amazon.com, Inc. (NASDAQ:AMZN) lists 200,000 items under the portable power banks category alone.
The only reason why ZAGG is getting a Pokemon Go bounce is that it’s the closest thing to a publicly traded pure play for battery packs.
If that’s not enough risk for you, ZAGG carries about $19 million in long-term debt on cash and equivalents of $6 million. Total debt stands at about $70 million. It’s also cash-flow negative for three of the last four quarter. In the most recent period, cash flow was negative $25 million after paying interest on debt.
There’s nothing wrong with levering up to fund future growth. Goodness knows ultra-low interest rates make it a great time to borrow. But it does increase risk.
There’s also something unsettling about 7% of the shares outstanding being sold short — a number that will surely rise if Zagg continues its ascent.
ZAGG stock looks like it has probably wrung every ounce of extra sales out of any Pokemon Go boost. The best part of this trade is over.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.