In the last fifty years the stock market has shown that companies that successfully operate in the consumer electronics space are able to capture almost unimaginable riches. What started with the retail of refrigeration units and home appliances like blenders, toasters and microwave ovens in the 1950s and 1960s evolved to televisions, walkmans, CD players and MP3 players more recently.
For investors who were able to foresee the trends before they truly took hold, online options trading in publicly listed companies like IBM, Hewlett Packard, Microsoft and Apple all paid off handsomely as the mass market adopted their products for everyday use and changed whole industries.
Earlier in history, companies would manufacture a full range of consumer electronics in a bid to capitalize on market share and build brand loyalty. For example, Sony made televisions, DVD players, music players as well as a host of other devices, as did its competitors. Now, however, it is far more common to have companies that specialize exclusively in one product, and aim to dominate that market.
Skullcandy Inc (SKUL) is one business pursuing this specialization strategy, with the gains exhibited by the stock showing a rise from under $7 mid year last year to recent levels near $10 recently.
Understanding the Business
The business model of Skullcandy (SKUL) is to research, design, manufacture and market their own brand of electronic equipment for the mass market. As the name suggests, their core focus is headphones and other audio equipment, ranging from basic earphone buds to high quality DJ standard noise cancelling headphones.
The company seeks to target several discrete customer bases. The first, and undoubtedly the largest, is the consumer mass market. The success of targeting this segment of the market has been shown by companies like Beats, pioneered by well-known rapper Dr Dre, which was acquired by Apple Inc for a sum reportedly over $2 billion. The marketing for this segment aims to target consumers who are looking to upgrade their headphones from the “basic” or “stock” ones that come with their phones or digital music players to a more premium model.
The next targeted segment is the large and growing “gaming” market. Consoles like the XBOX One, Playstation 4 and range of Nintendo and Sony handheld devices have contributed to the rapid expansion of the gaming market beyond the core PC gamers. Increasingly, games on these platforms are massive online multiplayer games, with as few as two to as many as hundreds of gamers playing online at one time.
This kind of game has enabled the rise of “social gaming” where the players interact with each other in real time. And because their hands are occupied with manipulating the keyboard or handheld controller, they require headphones with microphones able to transmit their voice via the internet to other gamers. In addition, headphones are required by those gamers who want the full audio experience without disturbing those around them, which includes children travelling with their parents and adult gamers on trains and buses.
The other subsidiary product lines that the company is involved in include speakers, apparel and other electronic accessories. The company reaches their market through online sales, physical stores, third party distributors as well as a range of large and small format general and electronic stores across North America and globally.
Metrics and Measures
The smart targeting of segments and clever marketing campaigns adopted by the company have driven some impressive recent results for Skullcandy (SKUL). The most recent quarterly results showed a rise in revenue from sales from $50 million to $58.1 million, which was well over 15% higher.
In addition, the margins charged by the company expanded, from 44.9% to 45.3%. This was likely the result of manufacturing efficiencies and a reduced need to discount their products as demand stayed strong. The gross profit result reflected these positives, with growth of 17.4% to $26.3 million for the quarter when compared to the previous corresponding quarter.
The results also showed that initiatives to grow offshore markets were beginning to take hold, with an increased number of sales in China,Canada and Mexico contributing to an 11.1% increase in international sales to $19.5 million.
The Investment Case
The investment case for Skullcandy (SKUL) is a similar profile to many other consumer electronic companies. The requirement for success in this space is to position the company as a “must have” to the largest possible array of consumers. For example, Apple was not the first to create a digital music player, but the clever marketing and execution of their products, coupled with their reliability, battery life and features such as the iTunes Store, meant that they effectively dominated that market.
In a more recent and related example, the headphones manufactured by Beats took the otherwise plain headphone market and made the Beats by Dre headphones a fashion accessory for the rich and famous. This subsequently translated down to previously unimaginable sales figures for a retailer of headphones, as mass market consumers across the world demanded the product, culminating in a $2 billion buyout of the company.
This is the business model that Skullcandy (SKUL) is seeking to replicate. Their growth initiatives include more actively growing the niches of gaming through their subsidiary Astro Gaming division, while also developing their sports and leisure offer.
As with any consumer facing company, the execution of their marketing and sales strategy through promotions, sponsorships and brand ambassadors is particularly important for future success and credibility.
Skullcandy (SKUL) is a company operating in a sector of the market that has previously proven it can create multi billion dollar success stories. It would be hoping to emulate the examples of Apple and Beats in pursuing this goal for itself. Much of the success of the company depends on executing its sales and marketing correctly, and capitalizing on strong sales periods like holiday seasons.
In order to profit as an investor in SKUL, it helps to have a stock picking service or options advisory newsletter available to guide your timing and investment decisions. The ability to buy stock at the right time in the right company greatly increases your prospects of future profits.