Are Investors Out Of Their Skulls to Think Skullcandy Is Worth So Much?

Source: Skullcandy.

Does Apple (NASDAQ: AAPL  ) buying headphone maker Beats Electronics for a rumored $3.2 billion, essentially valuing it at twice its sales, mean Skullcandy (NASDAQ: SKUL  ) , which goes for less than its sales, is undervalued by at least half? Although some analysts have taken that view, I'm not certain it automatically should apply to Skullcandy even if its depressed stock price otherwise makes it an attractive M&A target.

First off, if that is the price Apple is ready to pay for Beats, it sounds like a pretty steep premium simply to regain the "cool" factor it's lost over the past few years. After all, during Beats' last round of financing in September, the headphones maker and music service operator raised $500 million from the Carlyle Group, valuing it around $1 billion or so. So more than triple that amount is a big price tag to be shelling out just months later.

Second, some analysts are left scratching their heads as to why Apple is making this acquisition when they had anticipated the tech giant would go for an on-demand music service to complement iTunes and iRadio. That it went for a hardware company and a service that's similar to what's already in existence is baffling to them. 

More important, however, Skullcandy just doesn't have the same cachet as does Beats, and despite several well-received products like Crush and Air Raid, it's still in the very early innings of a turnaround that has yet to prove it's actually gaining traction. A quarter doesn't make a trend, and there have been plenty of disappointments on the way to losing two-thirds of its value since its 2011 IPO, enough that investors should be wary of getting caught up in any emotional takeover momentum.

As its stock slid, Skullcandy has been a long-rumored M&A target, and though the environment for acquisitions is favorable -- like Apple, companies have lots of cash sitting on the sidelines looking to be spent -- the accessories maker has failed to come through for investors in that venue as well.

That could be because revenue growth isn't nearly the same as it once was, from a near-50% high in 2009 to an anemic 7% to 8% this year and next. Operating earnings, as well, were at best just incrementally higher last year compared to the year before. While bulls may argue the company is in repair mode, it should've worked out the kinks before going public. A highly competitive marketplace isn't where you should be getting your business right, suggesting Skullcandy wasn't ready for prime time when it did its original offering.

Although that makes the case for a buyout being Skullcandy's best option, it doesn't argue for one actually materializing -- or if an offer does pop up, that it will be at such a premium. It's further rumored that Apple wanted Beats for the marketing and branding halo effect it could provide, that CEO Jimmy Iovine alone is worth the billions about to be paid out. Perhaps, but Skullcandy seriously lacks in that department as well. There's no must-have name to acquire, and while many contend its products are even better than Beats' in many respects, Skullcandy is a distant second in the court of public perception, and as perception is often reality, demand for an acquisition may not be there.

Skullcandy's boat was lifted by the rising tide of takeover rumor, but it's still a leaky craft and investors would do better watching how it works out its problems rather than hoping they can get bailed out by a deep-pocketed partner.

Are you ready to profit from this $14.4 trillion revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 13, 2014, at 7:43 PM, SirMunger wrote:

    Please research the companies you write about before writing about them. There's way too many errors to even begin to correct.

  • Report this Comment On May 20, 2014, at 8:14 AM, rsinj wrote:

    SKUL's PEG ratio is -4. Those who are MFs know what that means.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2956183, ~/Articles/ArticleHandler.aspx, 8/31/2015 8:02:15 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


Today's Market

updated Moments ago Sponsored by:
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASD 4,776.51 -51.82 -1.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 3:59 PM
SKUL $7.02 Down -0.06 -0.85%
Skullcandy CAPS Rating: **
AAPL $112.76 Down -0.53 -0.47%
Apple CAPS Rating: ****