Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Skullcandy Inc (SKUL), Apple Inc. (AAPL): One of 2011’s Most Disappointing IPOs Could Get Even Worse

I own at least two pairs of Skullcandy Inc (NASDAQ:SKUL) headphones — for what I paid, the sound quality is excellent; I can’t complain.

But thankfully, I don’t own any shares of Skullcandy Inc (NASDAQ:SKUL), the company. Since its IPO roughly two years ago, it has lost nearly 75% of its value, and based on emerging trends, things could only get worse.

Skullcandy Inc (NASDAQ:SKUL)Regardless of the quality of its earbuds, Skullcandy Inc (NASDAQ:SKUL) is facing a wave of competition. Increasingly, companies — including Motorola, LG, and Sony — are bundling premium headphones with their mobile devices, something Apple Inc. (NASDAQ:AAPL) has done for years. That’s not good for Skullcandy’s business.

The case for Skullcandy

Skullcandy Inc (NASDAQ:SKUL) is a maker of (mostly) budget earbuds and headphones. Despite the fact that the company faces innumerable competitors, it has somehow managed to stand out — a combination of brightly colored earbuds and celebrity endorsements may have helped.

That brand recognition, combined with the increasing popularity of mobile devices, may have made Skullcandy Inc (NASDAQ:SKUL) an attractive investment.

There has even been talk of a buyout. Bloomberg named the company a “takeover target” in January, specifically citing Bose and Sony as possible acquirers. If either of those companies was really considering buying Skullcandy back then, it’s good that they waited — shares are down 34% year to date.

Skullcandy’s disappointing earnings

Skullcandy’s selloff hasn’t just been the product of an overvalued IPO. Rather, it has been commensurate with its financial performance, which has been terrible since the company went public.

Most recently, Skullcandy’s second quarter earnings report showed a 30% drop in sales from the prior year. At the same time, the company announced the resignation of its CFO.

Skullcandy’s home market, North America, was particularly hard hit, with sales slumping 39%. Coincidentally, international sales rose by a nearly equal percentage (just over 40%), but it was not enough to offset the North American decline.

Skullcandy’s CEO said that the company is establishing a base for a turnaround. Unfortunately, that’s going to be difficult.

Mobile device manufacturers are following Apple’s lead

That’s because more mobile device makers are bundling premium headphones with their devices.

LG unveiled its newest smartphone last Wednesday, the G2. Besides uniquely placed buttons (LG is putting them on the back), the one thing that stuck out about the device was the pair of earbuds the company announced with it.

LG’s Quadbeat 2 earbuds reportedly offer premium bass and less distortion than competing earbuds. It isn’t clear, but it’s likely that LG will bundle the earbuds with the G2.

Then there’s Motorola. The company has consistently cost Google Inc (NASDAQ:GOOG) millions of dollars every quarter since the search giant purchased it in 2011 (last quarter, the loss was over $200 million).

But that could change. Motorola’s new smartphone, the Moto X, looks like it will be a hit. Although it doesn’t have the best specs, the Moto X offers something no other phone does — the ability to customize the color of the device.

Of course, if you’re buying your phone for its custom color scheme, then you’re obviously going to want some matching headphones. In that case, Motorola has got you covered.

Motorola itself isn’t making them (a company called SOL Republic is), but would-be buyers of the Moto X have the option to purchase headphones in the same color as their handset (they can also get a matching Bluetooth speaker).

If the Moto X is going to sell, it’s going to be because of that level of customization — in a way, colored earphones could net Google Inc (NASDAQ:GOOG) hundreds of millions of dollars.

Sony has been making quality headphones for years. Now it appears to be using its headphones to help it enter the mobile market.

The Japanese electronics giant offered a free pair of premium headphones to consumers in the U.K. that pre-ordered its Xperia Z smartphone back in February. It’s currently running a similar promotion that offers free headphones to buyers of its Xperia Z tablet.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.