Rosetta Stone (Nasdaq: RST), the company behind the popular language learning software, is a great company to watch. It's proof that having a great product doesn't automatically mean a company will be wildly successful; it also needs a strong leader to help guide it down that road. CEOs have come and gone at this company, beating it down a bit more each time, but the newest CEO could help turn this company around.
Buy
Great product: I don't think there are many people out there who have used Rosetta Stone and would dispute that it is easy and effective. And with the addition of Totale, which allows monthly subscribers to spend an hour talking and learning with a native speaker, it works with all types of learning styles.
International growth: International growth for people who want to learn English is one of the largest growth opportunities available to this company, but international expansion has a learning curve for any company. Rosetta Stone has spent a few years working on this and has hit a few bumps along the way. Management now feels that the company is in a position to better understand how the product should work in these new markets.
Google (Nasdaq: GOOG) has recently been working to improve its online translator in response to the same trend in cross-cultural communication, but it's still cumbersome and inconvenient, leaving Rosetta Stone with the advantage for now.
Institutional growth: Another great growth opportunity lies within institutions, like international corporations, the government, K-12 schools, and even higher education organizations like Corinthian Colleges, American Public Education, and Apollo Group.
As Rosetta Stone finally makes the move to the cloud (welcome to 2011, guys!), these companies and their online-based classrooms seem like the perfect match, where both sides would absolutely benefit. And again, with such a fantastic product, building relationships and developing contracts with these institutions could provide a great source of recurring (and higher-margin) revenue for Rosetta Stone.
Sell
The numbers: This is a big one, and the main reason most investors don't want to touch this company with a 10-foot pole. Unfortunately, a great product hasn't been enough for Rosetta Stone. The company consistently misses opportunities to capitalize, which has driven the stock price down more than 60% in just three years. And things are even more painful when you compare that performance to the S&P 500:
Rosetta Stone Stock Chart by YCharts
Additionally, when recent fourth-quarter earnings were released, investors found out that while year-over-year revenues increased 5% in Q4, the company still ultimately realized a bottom-line loss in what is supposed to be its best quarter of the year. This was ahead of Wall Street's estimates, but what parent is ever happy with a D instead of an F?
Hold
New CEO: This is the big story for Rosetta Stone right now. The company recently announced that former executive Steve Swad would be the company's newest CEO. In the most recent conference call, he acknowledged that his work was cut out for him, but refrained from offering any guidance just yet for the upcoming year.
He did state, though, that he hopes to triple the size of the company. This may seem overly ambitious, but with a measly $200 million market cap and so much growth potential, the right guy could make that happen. It will be interesting to see if Swad will be the miracle worker this company has been waiting for.
Right now, Rosetta Stone is a very interesting hold for me. I love the product, and I'm intrigued by the growth opportunities and Swad's ambition. I'll be waiting for his 2012 guidance before I make any investing decisions, but I'll admit that I'm looking at a half-full glass here.
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