GameStop Corp. (GME): How to Make a Company Disappear 101

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Corning introduced its high-strength alkali-aluminosilicate thin sheet glass, Gorilla Glass, in 2007 for the first iPhones.  Since that time, the global manufacturer of glass and ceramics has updated the Gorilla Glass to be nearly indestructible.  The latest version called Gorilla Glass 3 may be the beginning of the end for Zagg and their screen protector business model.  Gorilla Glass 3 has durability enhancements known as “native damage resistance” all the way down to the atomic level.  With a glass that is basically 40% more scratch resistant, the potential 1 billion user’s mobile screens that currently feature earlier versions of the very durable Gorilla Glass, could be upgraded to Gorilla Glass 3 in the coming years.

Corning’s recent earnings show that net sales declined, driven by lower sales in the Display Technologies, Telecommunications, and Environmental Technologies segments, were offset by higher sales in the Specialty Materials segment.  Gorilla Glass is part of the Specialty Materials segment and demand has been increasing at a steady pace with a net income change of 55% for the 3rd quarter of 2012 versus the same period in 2011.

Where Corning has seen a modest increase in share price the last 6 months of over 7%, Zagg has fallen over 36% in the same time frame.  Although Zagg’s lineup of 5,900 precision, pre-cut invisibleSHIELD designs among many other skins and protectors have helped Zagg increase net sales 59% for the first 9 months of 2012 versus 2011, I see growth opportunities limited and it looks like investors do too.  Currently, the invisibleSHIELD product line accounts for approximately 48% of Zagg’s revenues.  This could take a big hit as Gorilla Glass 3 arrives.  Gross profit margins are already declining for Zagg as they seek future growth in sales of their non-invisibleSHIELD product lines.  Quarterly profit margins for the past 5 years have averaged 9.56%.  However, Zagg has only beaten this average once the past 6 quarters.

Lastly, the other intangibles don’t help the Zagg story.  They face competition by the growing presence of copycats and cheaper alternatives on auction sites like eBay.  Rapidly changing technology used to be a positive for Zagg since more devices means more screen protectors.  However, changing technology may start to be a negative as customers find less need to protect their soon-to-be obsolete-in-one-month devices and would rather save the extra money towards the latest and greatest.  What is the point in putting a screen protector on a smart phone when you will replace that same phone in less than 2 years?

GLW Total Return Price data by YCharts

The Prestige

The third step in magic, The Prestige, is often the hardest part of creating a great magic trick.  Would David Copperfield’s vanishing of the Statue of Liberty be as great if he didn’t make it reappear?  No.  So the question is how can management of both GameStop and Zagg make the third act a success and bring back the greatness that both stocks had in the past?  GameStop may have to team up with a big online subscription presence in order to stay relevant with today’s gaming trends.  They might have to completely change the business model entirely.  Zagg’s proprietary invisibleSHIELD film was originally used to protect military helicopter blades from high-speed damage.  As I look at the front of my car and see all the nicks and pits of damage from road debris, rocks, and gravel, I start to wonder.  Maybe Zagg’s product doesn’t have to apply primarily to electronic devices?

The article How to Make a Company Disappear 101 originally appeared on Fool.com and is written by Michael Carter.

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