Don't Sell LeapFrog Just Yet

It's another slippery day for LeapFrog Enterprises (NYSE: LF  ) investors. Shares of the maker of electronic learning toys opened lower this morning after Ascendiant moved to downgrade the company. 

Ascendiant is lowering its price target from $12 to $8 after channel checks came up showing uninspiring consumer demand for the new LeapPad 2 Power and LeapPad Ultra. It's not always smart to get in the way of Wall Street pros when they put their ear to the ground, but are we really going to judge LeapFrog's success on new products when we're still six weeks away from the start of the holiday shopping season?

Now, Asendiant isn't even the first firm to place LeapFrog on the naughty list this season. BMO Capital Markets downgraded the stock last month -- going from outperform to market perform and slashing its price target from $15 to $10 -- after a hands-on test of the $149 LeapPad Ultra came across a few glitches. That downgrade seemed shortsighted, since a quick check on Amazon.com's website shows that early customer reviews are in line with the first two generations of the LeapPad product line, combining a vetted tablet experience with LeapFrog's award-winning learning games.

Ascendiant's somber note today taps into lackluster initial sales, but isn't it still too soon? After all, in recent weeks the improved LeapPad Ultra is getting noted in several influential lists of the upcoming holiday shopping season's hottest playthings. If you don't think parents pay attention to Dr. Toy's "10 Best Technology 2013" countdown or Toys R Us' "Fabulous 15" or The Toy Insider's "Hot 20" lists, you're underestimating how much more likely parents of young children are to lean on a seasoned toy critic rather than a disappointed analyst.

Source: LeapFrog Enterprises.

This will be a challenging season for LeapFrog. Amazon.com's (NASDAQ: AMZN  ) recent move to slash the price of its Kindle Fire to $139 -- cheaper than the Ultra -- may cost it some customers. Tablets continue to get cheaper. We also can't dismiss the appeal of Amazon's FreeTime Unlimited, the online retailer's subscription-based Kindle Fire service for kids.

However, we can't immediately dismiss LeapFrog's own advantages. Any company can get disrupted, and with cheap Chromebooks and even cheaper Android tablets there are many parents who no longer fret about letting their kids play with grownup gadgetry. However, it's not just about cheap hardware. A potential player in this market can't just stumble into LF's learning software, which adapts to usage, build up the online connection with parents via Learning Path, and ink the deals creating the treasure trove of kid-friendly licenses overnight. They can always buy LeapFrog instead. A potential buyout, ideally at a premium, isn't reason alone to own any company, but it's a testament to a moat that is stronger than naysayers give it credit for.

LeapFrog may be slipping in popularity on Wall Street, but now we get to see if parents of young children and their kids feel the same way.

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  • Report this Comment On October 10, 2013, at 5:48 PM, jbonefish wrote:

    Does anyone know what the parent tablet-ownership mix is for Leapfrog tablets?

    i.e. parents don't own tablet, parents own iPad, parents own other tablet brand? That would be a fascinating data with potential implications for Leapfrog's competitive position and maybe even buyout potential

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