Why LeapFrog Enterprises Could Head Even Higher

Shares of LeapFrog Enterprises (NYSE: LF) hit a 52-week high on Thursday. Let's take a look at how it got there and see whether clear skies are still in the forecast.

How it got here
We've all seen it by now: the pre-teen child who has his or her own smartphone, which causes the immediate shaking of our heads in disbelief. It's a trend that's on the rise and it's something that LeapFrog shareholders have come to appreciate.

LeapFrog has separated itself by leaps and bounds in recent quarters from toy-making and child-focused education product producers Mattel (NYSE: MAT), Hasbro (NYSE: HAS), and JAKKS Pacific (Nasdaq: JAKK) with the introduction of its affordable tablet learning agent, the LeapPad. The $100 tablet is relatively cheaply priced, and according to CEO John Barbour, the company is ready to develop its own apps specifically catered to children. If this sounds eerily familiar to what Apple's done with regard to the iPad, that's because it's almost a carbon copy -- except for the targeting kids part. Barbour noted that a flood of competitors, including direct competition from Google's (Nasdaq: GOOG) Android operating system, will be a challenge to its app-based model, but he is nonetheless optimistic.

The results of this revolutionary product are plain to see in LeapFrog's latest quarterly numbers. Revenue grew by 81% with U.S. sales nearly doubling to $52 million. Multimedia learning platforms and content-line net revenue almost tripled while gross profit jumped by a whopping 153%. However, LeapFrog is a cyclical company, so it still reported a net loss for the first quarter, but its product line is becoming less cyclical and more "everyday" as it becomes more tech-oriented.

How it stacks up
Let's see how LeapFrog Enterprises stacks up next to its peers.

LF data by YCharts

The ebb-and-flow popularity of certain toys has made it difficult for shareholders to lock in big gains over the past five years. Let's take a closer look at each company's individual metrics.

Source: Morningstar. Yields are projected.

This sector has clearly broken down into a battle of growth versus income.

Mattel and Hasbro are the two toy-sector stalwarts and both missed Wall Street's expectations in the most recent quarter. Mattel blamed weakness in Barbie sales for the miss while Hasbro noted lower sales of its Monopoly board games and Nerf-brand products. JAKKS Pacific, the maker of Pokemon branded toys, has missed earnings estimates in three straight quarters. What these three companies all have in common is that they pay a respectable dividend (especially Hasbro at 4.2%), but they also deal with changing consumer spending habits, business cyclicality, and short shelf lives for many of their toys, which necessitates constant innovation (i.e., spending, spending, and more spending).

LeapFrog won't give shareholders a cent in dividends, but its LeapPad platform has game-changing possibilities. It might sound difficult to get kids hooked on the idea of a learning tablet, but throw in the option to purchase apps for the LeapPad and I feel you have an instant blockbuster that will have greater shelf life and possibly even transcend economic cyclicality.

What's next
Now for the $64,000 question: What's next for LeapFrog Enterprises? That basically depends on the continued development of the LeapPad and how successfully it can integrate apps into the platform while also dealing with inevitable competition.

Our very own CAPS community gives the company a four-star rating (out of five), with 82.5% of members expecting it to outperform. Although I've yet to make a CAPScall on the company in either direction, I'm now ready to anoint LeapFrog with a rating of outperform.

Despite yesterday's downgrade and news late last night that its CFO would be leaving the company to spend more time with his family, the investing thesis that LeapFrog looks ready to transcend the cyclical boundary of its industry remains intact. The company boosted its full-year EPS forecast in the first quarter and looks poised to outgrow its competitors over the next couple of years. Despite the run-up, I feel LeapFrog could still double from these levels.

The LeapPad isn't the only technological revolution raking in the big bucks. According to The Motley Fool's senior technology analyst, Eric Bleeker, another company is poised to make a killing on the upcoming trillion-dollar mobile revolution. Find out the identity of this company by clicking here to get your free copy of this latest special report.

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