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.