Now that the post-IPO quiet period is over, a number of firms have initiated coverage on headphone maker Skullcandy (Nasdaq:SKUL). Does it really surprise anyone that the six banks initiating coverage on the stock were the six banks on the cover of the IPO? Likewise, does it surprise anybody that the coverage was universally positive? More and more, it seems like that "Chinese wall" between research and banking is creeping back to something more like the perforated Saran Wrap of the pre-tech bubble days.

Investopedia Markets: Explore the best one-stop source for financial news, quotes, and insights.

Whatever the conflicts of interest may, or may not, be, does Skullcandy deserve the love on its own merits? More to the point, can this company find a way to make a real business and real profits out of what has traditionally been a market bifurcated between throw-away, low-performance junk and super-high-end and very expensive gear for audio nerds?

The New Kid on the Block
Founded in 2003, Skullcandy hopes to bring something new and different to the headphone and earbud market - a market largely dominated by established names like Sony (NYSE:SNE), Philips (NYSE:PHG), Bose and Koss (Nasdaq:KOSS). What isn't clear yet is whether the company is bringing interesting new technology and features or simply new hype and marketing sensibility.

Thus far, reviews on the Skullcandy products have been mixed - some audio reviewers really seem to like them, others squabble and nitpick about the midrange sound quality and claim they're only suitable for rap or electronica (where strong bass works well). What is clear, though, is that the company is paying a great deal of attention to marketing and distribution. Skullcandy has made sure that its earbuds find their way into the hands of athletes, X-gamers, Djs and other so-called "image leaders." Consequently, brand recognition here is quite strong in the core youth market.

Just as wisely, management has made sure that people can actually buy these. Skullcandy seems to be doing an admirable job of creating the sense that their products are cool and exclusive, but they're actually widely available. These products are found in such everyday stores as Target (NYSE:TGT), and Best Buy (NYSE:BBY), warehouse stores like BJs, and sporting goods retailers like Dick's (NYSE:DKS).

Now the Tricky Bit
So far, Skullcandy is certainly doing well financially. Sales were up 46% in the last quarter and EBITDA was up a similar amount. In fact, Skullcandy has already grown to be the #1 player in earbuds and #3 overall in headphones (behind Sony and Monster).

The question is, though, can the company really make a go of this as a product category? Koss is a recognized brand with good low-end products and a relationship with Radio Shack (NYSE:RSH) but has seen revenue flag for five years. Bose has a network of stores around the country, but likewise found a ceiling to its market penetration (perhaps due in part to a very divided view on the quality of its products).

Plenty of hot products have jumped into the teen/young adult market, gotten a lot of publicity and initial sales growth, and then disappeared. Call it the Crox/Hot Topic effect. Then again, there have been hot products that have hit the market, garnered a lot of hype for the company, and then shown real staying power. Look at clothing companies like Under Armour (NYSE:UA) or lululemon (Nasdaq:LULU) or even Apple (Nasdaq:AAPL) as example of what can happen when powerful marketing is supported by legitimately good product.

The Bottom Line
It seems silly to spend real money on a music player and then lose out on the experience because of cheap headphones or earbuds. Maybe Skullcandy is simply testament to the idea that the right amount of marketing can turn practically anything into a prestige item. Or maybe this company really can develop solid products that deliver good sound quality and product life. If the company can back up the hype with quality, there's no reason the stock can't work and the company could well be a buyout target for a company like Nike (NYSE:NKE), Sony, or perhaps even Apple.

It's easy to be snotty about seeing a bunch of 'buy' recommendations coming from the same banks that just cashed fat checks for handling Skullcandy's IPO. The thing is, though, that the valuation here is not unreasonable if the company can continue to grow nicely. If Skullcandy can approach $500 million in sales by 2015 it will have not only accomplished something pretty remarkable in the audio industry, but should also be able to generate some real gains for shareholders. This isn't a stock for nervous hands, but investors who like to play growth and a little hype could find some winnings here. (For additional reading, take a look at How An IPO Is Valued.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!