Skullcandy Inc (SKUL), Zagg Inc (ZAGG): A Couple of Classic Value Traps

If there is a bright spot for ZAGG, it’s that the Apple plans to launch a new iPhone later this year. Some analysts are expecting a lower priced iPhone to help expand Apple Inc. (NASDAQ:AAPL)’s customer base. The cheaper alternative is just speculation at this point, however, the option may be very beneficial for the company.

Apple Inc. (NASDAQ:AAPL)’s popularity in key developing markets, such as China and India, has been much lower than in the United States. If you give a greater number of consumers access to the ecosystem, in the future these consumers should have a greater sense of loyalty towards the brand. As incomes rise in these markets, I would expect consumers trade up to Apple Inc. (NASDAQ:AAPL)’s full ecosystem. At this point, the risk-reward is very good for investors.

The company is trading at 10 times forward earnings while paying investors a 3% dividend yield. Rising interest rates additionally bode well for Apple’s dividend yield. As of the most recent quarter, Apple Inc. (NASDAQ:AAPL) held $144.7 billion in interest generating capital, roughly 33% of the current market cap. If interest rates rise a measly 1%, the company would generate an additional $1.45 billion in returnable capital.

If a more affordable iPhone is indeed released, I feel ZAGG would stand in a decent position to capture this consumer as its basic products do tend to hit the lower end of the range. I would rather invest with Apple, however, as the company seems to be expanding into previously untouched industries such as mobile commerce.

Foolish conclusion

Both Skullcandy Inc (NASDAQ:SKUL) and Zagg Inc (NASDAQ:ZAGG) look inexpensive, but when you consider the terrible growth projections, it appears this may be a classic value trap. Skullcandy offers low quality products for relatively low prices, and I find it hard to believe consumers will choose Skullcandy Inc (NASDAQ:SKUL) should the company raise price drastically. ZAGG is no longer the best manufacturer in the industry, and don’t expect anything to change.

When looking to invest in technology, pick companies with proprietary goods and strong pricing power. Apple fits this bill and at these levels, it is far greater value. Should Apple launch a lower priced, entry level iPhone, I would expect consumers in developing mobile markets to respond positively.

Nathaniel Matherson has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and SKULLCANDY INC. (NASDAQ:SKUL). Nathaniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article A Couple of Classic Value Traps originally appeared on Fool.com is written by Nathaniel Matherson.

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