So far this year, Leapfrog Enterprises (NYSE: LF) stock has taken a beating. Increased competition in the space and decreased earnings estimates for the holiday season have driven the stock down from nearly $12 in August to the low $7 range, at a depressed P/E ratio of 6. I believe that this is an overreaction by the market and it's time for Leapfrog's stock to hop back up. 

Leapfrog's niche
Leapfrog has developed quite a brand that has kept it in the market thus far. The heart of the brand lies in the effectiveness of the products in making real learning fun. With eleven years of undivided attention to child development, Leapfrog has pinpointed 2,600 different skill sets that are predictors of future success and potential in their "proprietary scoping sequence." The educational games are based around groups of these skills and built from the ground-up by a team of learning experts with doctorates in cognitive development and early childhood education. After a game is developed to be educational in theory, it is then tested among the 2,500 families that sign up to give feedback on a product. In 2013, three hundred families brought these devices home for testing, to better design a system that would fit into their lifestyle. The result of all this deliberation and care? Nobody, arguably not even a teacher, understands children's learning and lifestyles better than Leapfrog.

Sizing up the competition
The competition in the tablet space is heating up, and some experienced tablet makers have been eyeing Leapfrog's market. Tablets from the likes of (NASDAQ:AMZN), Samsung, and Apple (NASDAQ:AAPL) have started adding features and apps directed toward children's education. Other companies already in the space, such as VTech, are always nipping at the heels of Leapfrog. 

Amazon is arguably the biggest threat to Leapfrog with its Kindle FreeTime service. For $4.99 per month ($2.99 with Prime subscription), parents have unlimited access to thousands of kid-friendly books, games, educational apps, movies, and TV shows. The app also has some design and technical elements geared toward children: such as tools for limiting usage, individual profiles, and a kid-friendly appearance. All-in-all, this is impressive. I have not checked this out in person, but it seems to make financial sense to me considering it is less than the cost of buying one book per month for your child.  

Samsung has taken a slightly different route with its Samsung Galaxy 3 7.0 Kids. Rather than assuming that parents want to share their tablet with their children, Samsung wants them to have one of their own. I agree with this thinking, because I can foresee my future, parent-self watching my child like a hawk while they play with my $600 tablet. The Galaxy Kids is enclosed in a rubber bumper case to offer some protection, but I still don't think it could compete with the durability of the LeapPad line. In addition, Samsung offers a kid-version of the Android OS and some decent specifications, but the general consensus of my online research is that $200 could be better spent elsewhere.

Apple has yet to come out with an iPad geared toward children to challenge Leapfrog, and I doubt that they ever will. The revenue for Leapfrog in the most recent quarter was just over $200 million. Apple posted revenue of $37.5 billion in Q4 of 2013. I don't think that Apple would bat an iLash at the thought of going after a new market that presents the opportunity for a 0.5% increase. Their time is better spent protecting the 52% of their revenue that iPhones produce from the Android push. More realistically, Apple would buy Leapfrog and take advantage of their talent.

The outlook
I believe that this new, widespread competition does not have as great of an impact on Leapfrog as suggested because they are approaching the same market in different ways. Amazon and Samsung have taken existing technology and found little tweaks to make it safe for children to use. They have put parental controls on the tablet experience, nothing more. Leapfrog has studied what children need, and then built a product to meet it. Leapfrog's products are used to supplement formal education, and perhaps eventually replace it. In Leapfrog's Imperial Global Opportunities Conference CFO Ray Arthur presents some startling statistics. "Though children are our future, 50% of children that are entering kindergarten have difficulties... 69% of high school attendees actually graduate." He also points out that for the first time in the history of America, this generation is going to be less well-educated than their parents. With 53% of American's dissatisfied with the quality of education, he feels that there is a huge market for Leapfrog to step up.

In conclusion, of the parents who were considering buying a Leapfrog product as a media tool only, perhaps Amazon or Samsung will take some of that market. However, the 53% of parents who feel education can be improved are unlikely to look to meaningless "kid-friendly" apps, movies, and games to supplement education. With that, I believe the larger, growing market for a product that teaches children educational and life skills is still strongly in Leapfrog's hands (webbed feet).