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The story of Leapfrog: Baby Apple



May 26, 2012 – Comments (1) | RELATED TICKERS: LF.DL

It’s one thing to watch customers enjoy the products they are fond of but it’s quite another for them to make videos of themselves using those products and ponder the possibility of investing in the company that makes the products they love so much.

That’s the story of Leapfrog, a company whose edutainment products are so popular with kids that that their mothers post videos on YouTube of their children playing with the LeapPad. The LeapPad defines Leapfrog’s success and growth in much the same way that the iPhone and the iPad have defined Apple’s destiny.

Leapfrog’s LeapPad strategy is very much like that of Apple with the Leapfrog Learning Path and its accompanying multimedia platform shaping up much in the same way that iTunes has. The difference is that Leapfrog is the market leader in the 4-9 year old learning toys segment with the LeapPad being voted Toy of the Year 2012.

Financial results for Q1 2012, showed revenue growing at 81% to $72MM, gross margins up 11 percentage points to 41% and a cash increased by 73% to $135MM relative to Q1 2011. LeapPad’s current performance belies its emergence from an extended period of poor management much like Apple did after the departure of Steve Jobs.

Key Fundamentals

Market Cap – $670M

Current Price: $10.05

DCF Valuation indicates a 10% overvaluation.

Price performance YTD – 80%, last 6 months – 115%, Last 12 months – 128%

Current PE – 20.51

Forward PE – 13.5

PEG – 1.03

ROE – 15.8%

Debt to Equity – 0.0

Operating Margin – 7.5%

Short Float – 3.79%

Last Analyst Rating – 05/04/2012 – Needham – BUY Rating

New Management that is passionate about the product and driven to see its success.

Risk Factors

Macro factors including a slowdown in consumer spending due to a growing recession

Product risk – poor execution on establishing a product ecosystem could lead to a loss of market share

Competition – If Apple were to decide to focus on the child learning niche and develop products specifically for that segment of the market, LeapPad would feel the heat.

Disclosure: Long LF and will continue to BTD at prices below $10.00

1 Comments – Post Your Own

#1) On May 28, 2012 at 12:24 AM, awallejr (37.00) wrote:

Not a bad choice.  Niche stocks can do nicely as long as no one else tries to muscle in.  Wish I knew about this one back in October of last year ;/

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