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    Hot Stock Alert – ZAGG Recovers amid Worsening Margins and Short Squeeze Talks

    ZAGG Inc. (NASDAQ: ZAGG) shares climbed more than 4% this morning, continuing Friday’s  16.3% surge on March 25 to $7.41, curbing the downward trend the company experienced this month. The recovery in stock price is most likely caused by a short squeeze, which is currently going on with ZAGG. The stock is heavily shorted with margins calls due dates approaching. The short interest as a percentage of float currently range around 40%.

    Despite the recovery, ZAGG lost 20% this month due to Apple‘s (NASDAQ: AAPL) launch of the iPad Smart Cover, a slick, magnetic cover-cum-stand for the iPad and a direct competitor to ZAGG’s cases. While the introduction of the Smart Cover is not expected to be huge blow to ZAGG, since the company addresses a wider range of gadgets, the market realized the vulnerability of the company’s business to third-party developments and pressured down its valuation.

    The subsequent release of Q4 2010 results, which topped the analyst estimates were not able to reverse the negative trend. Moreover, the market focused on worsening margins and outlook, which capped the company’s ability to grow exponentially in 2011.

    ZAGG is a leader in providing clear and scratch-proof covers for smartphones, tablets and iPod touch media players. The company’s products are distributed worldwide with popular brands like the invisibleSHIELD, ZAGGskins, ZAGG LEATHERskins, etc. ZAGG’s flagship product, invisibleSHIELD, is the original thin film full-body protector, and is available in more than 5,000 precision pre-cut designs with a lifetime replacement warranty.

    The company earned $10 million ($0.41 a share) on $76.1 million revenue in 2010, compared to $3.4 million ($0.15 a share) on $38.3 million revenue in 2009. Mobile (smartphone) sales account for 90% of its sales, while tablet products make near 7% of revenue mix.

    During Q4 2010, ZAGG introduced the ZAGGmate, a protective and functional companion to the iPad that accentuates both the appearance and utility of APPL’s device. Made from aircraft-grade aluminum, ZAGGmate is a protective case, featuring a simple and innovative hinge stand for viewing and typing in portrait and landscape mode, with a version containing a built-in wireless Bluetooth keyboard. The keyboard availability significantly enhances the possibility to do real work on the tablet, since the touch keyboard is suitable for limited data entry and simple emails. The keyboard feature as well as the screen protection, positions ZAGGmate well to compete against AAPL’s iPad Smart Cover.

    Benefiting from strong 2010 holiday season, as well as the introduction of new products, ZAGG reported a 157% growth in revenue to $29.3 million in Q4 2010 from Q4 2009 and a 27% sequential increase from Q3 2010. Gross margins slide to 46% in Q4 2010 from 54% in Q4 2009. The company earned $3.4 million or $0.13 a share in Q4 2010, compared to $0.3 million or $0.13 a share in Q4 2009. The average estimate polled by Thomson Reuters was for earnings of $0.12 a share on revenue of $21.2 million.

    The company’s guidance for 2011 calls for revenue to climb 25% to 31% to $95-$100. Gross margins would further dip to 45% range, but operating margins should hold up well, due to the scale effect. Analysts, surveyed by Thompson Reuters, expect ZAGG to earn $0.50 a share on revenue of $100.2 million in 2011.

    During 2010, ZAGG benefited from new distribution channels, the introduction of popular new devices such as the iPad and the iPhone 4 from Apple and other new mobile device introductions as well as continued strength in internet channels. ZAGG products are available online at ZAGG.com and in major retailers around the globe, including Best Buy, Target, RadioShack, Carphone Warehouse and hundreds of other retailers.

    ZAGG shares are now trading at 14.89x this year projected profitability and 11.89x projected profitability for 2012. While the last month raised some doubts about the company’s ability to further gain market share, the current valuation looks cheap for a company poised to grow at double digits rates over the long term.

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