Please ensure Javascript is enabled for purposes of website accessibility

Rosetta Stone's $30 Billion Opportunity

By Ed Salwin – Updated Apr 6, 2017 at 10:46PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Rosetta Stone could soar in the long run on international sales.

Rosetta Stone (NYSE: RST) could take a significant slice out of the $30 billion international market for self-study language-learning products.

This piece of the pie could more than compensate, many times over, for the company's struggling domestic sales. That's why I'm holding onto my Rosetta Stone shares despite their latest price plunge.

The good, the bad, and the ugly
Of course, it's possible that Rosetta Stone will be less popular abroad, so it's probably worth doing a rough best case vs. worst case comparison with respect to Rosetta Stone's potential long-term international expansion.

Note that Rosetta Stone has already captured around 8% of U.S. consumer market revenues, but less than 1% of this cake in the rest of the world.

Scenario

International Consumer Market Share (by revenue)

Revenue (in millions)

Earnings Per Share

Stock Price

Ugly Case 0.33% of the market $336 $0.82 $10.66
Bad Case 2% of the market $837 $2.03 $26.39
Good Case 8% of the market $2,637 $6.40 $83.20

Although the potential for international sales is to-be-determined, results seem promising so far: Rosetta Stone has seen early 150% international sales growth year over year.

Assumptions by association
For simplicity's sake, the above model conservatively assumes that the following figures remain constant: Current domestic consumer revenues and all institutional revenues, current net profit margin, number of shares outstanding, and its lowest-ever P/E of 13, which it hit in late February.

These assumptions seem reasonable when we compare them to those of three other public education software companies: K12, LeapFrog, and Blackboard.

Company

Revenue (in millions)

Net Profit Margin

P/E

Rosetta Stone $259 5.1% 21
K12 (NYSE: LRN) $449 3.3% 73
LeapFrog (NYSE: LF) $433 1.1% 54
Blackboard (Nasdaq: BBBB) $447 3.7% 74

Source: Capital IQ, a division of Standard & Poor's.

Buy or hold
We can quibble around the edges of the model's assumptions, but the fact remains: The potential upside is high if Rosetta Stone's international market share could rival its domestic one. That is, the stock could skip to $80 per share should Rosetta Stone be as international an icon as the rock itself. The downside, assuming Rosetta Stone sinks overseas (while neither growing nor shrinking in the U.S.), could yield a stock price not much lower than it is now. So I'll stick to my shares ... and perhaps dig up a few more.

Ed Salwin owns shares of Rosetta Stone. Rosetta Stone is a Stock Advisor pick. K12 is a Motley Fool Rule Breakers recommendation. Blackboard and Rosetta Stone are Motley Fool Stock Advisor selections. Blackboard is a Motley Fool Hidden Gems pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Rosetta Stone Inc. Stock Quote
Rosetta Stone Inc.
RST
LeapFrog Enterprises Inc. Stock Quote
LeapFrog Enterprises Inc.
LF.DL
K12 Inc. Stock Quote
K12 Inc.
LRN
$41.01 (0.69%) $0.28
Blackboard Inc. Stock Quote
Blackboard Inc.
BBBB.DL

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.