Buy, Sell, or Hold: Zagg

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at ZAGG (NASDAQ: ZAGG  ) today, and see why you might want to buy, sell, or hold it.

Launched in 2005 and based in Salt Lake City, ZAGG is a technology-focused company, known for its accessories for mobile devices. These include keyboards, ear buds, mobile power devices, headphones, cleaning tools, and protective coverings. Its brands include invisibleSHIELD, ZAGGskins, ZAGGbuds, ZAGGkeys, iFrogz, Aminatone, Caliber, Earpollution, and more.

ZAGG sports a market capitalization near $233 million. Its stock is down about 31% over the past year and over the past five years, it has averaged an impressive annual gain of roughly 59%.

Buy
A key reason that ZAGG might pique your interest is its connection to the mobile-device market, which is growing at really, really rapid rates. Already, there are nearly 7 billion mobile subscriptions. (That's on a planet that's home to about 7 billion people. Of course, billions are still mired in poverty, but other billions apparently have multiple accounts.) Meanwhile, smartphones are growing in popularity, and recently made up just one-quarter of all mobile phones. If a company serves such a market, it clearly has much potential.

Check out some of ZAGG's numbers, too. Its revenue, for example, has been growing explosively, at double-digit rates. (That rate has been slowing in recent years, though.) Its free cash flow has turned positive, and recently jumped significantly, too. ZAGG has more long-term debt than cash, but its debt has been falling. In its fourth-quarter report, its revenue grew 30%, and backing out a charge, it was profitable beyond expectations, as well. Management also offered rosy projections for 2013.

Given the company's growth rates, ZAGG's rough valuation seems compelling, too, with a recent P/E ratio of 16.5, and a forward P/E of just 6.5. The valuation seems low enough that company plans to buy back shares seem sound.

Meanwhile, the company is not standing still. It's expanding with recently introduced gaming accessories -- though the gaming industry is going through a transformation, with mobile gaming growing at the expense of physical game content. It has also been on the lookout for smart acquisitions, buying fellow accessory maker iFrogz in 2011. It's good that the company is diversifying away from what was its main offering, its screen protector. But that item delivered the richest profit margins, so diversification hurts some.

Sell
ZAGG's financial statements offer a few red flags. While its revenue has been growing, for example, its net income recently moved in the other direction.

One problem for ZAGG is that it doesn't have a strong competitive moat to protect it. Its customers are generally not locked in to it in any way. They can buy their next ear buds from someone else. Some view its offerings as becoming commoditized, too, as they face more competition. Corning is likely to hurt ZAGG's protective-screen business, with its ever stronger glasses for mobile-device screens. (Its Gorilla Glass has been a huge success and up next is flexible glass for a variety of applications.) Apple, too, can cause big headaches simply by including some of the accessories that ZAGG supplies with its products. The iPad 2, for example, came with a cover. (The market for Apple accessories was recently estimated at more than $2 billion -- and growing.)

Share dilution is another worry, with the company's share count having risen about 50% over the past few years. That's often not good for shareholders, though if the money raised by new shares is deployed very productively, it can be worthwhile. ZAGG is keeping its dilution in check to some degree via share buybacks.

If you find yourself with doubts about ZAGG, you're not alone, as it's heavily shorted, with more than 30% of its shares outstanding recently shorted.

Hold (off)
Given the reasons to buy or sell ZAGG, it's not unreasonable to decide to just hold off on it. You might want to wait for the company's earnings to grow at a good clip for a few quarters, or for it to reduce its debt more.

You might also check out some other interesting mobile-device-related companies, to see if they seem like better bargains than ZAGG. Perhaps take a look at Qualcomm (NASDAQ: QCOM  ) , with a dominant position in mobile chips and also holding a valuable patent library. In a show of confidence, Qualcomm recently hiked its dividend by 40% (it will now yield around 2.1%) and is introducing compelling and innovative new chips.

Or consider NVIDIA (NASDAQ: NVDA  ) , once known as a graphics company and now shifting much attention to the mobile realm, where it's competing ably with Qualcomm and others. The company's impressive high-performance Tegra 4 processor seems well positioned to serve both smartphones and tablets, due to NVIDIA splitting it into two lines. The company is also working on cloud-based gaming products, among other things. It, too, pays a dividend, recently yielding 2.4%.

The verdict
I'm holding off on ZAGG for now. Everyone's investment calculations are different, though. Do your own digging and see what you think. The company may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.

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