Rosetta Stone IPO: Good Risk / Reward Trade Below $20

Rosetta Stone: Strong pricing of I.P.O. should mean a good risk/reward trade for the next month

Wednesday evening language instructor Rosetta Stone (RST) priced 6.25 million shares at a stronger than expected $18 a share through an offering led by Morgan Stanley (MS). Pricing had been expected between $15-17. The shares will begin trading on the NYSE under the symbol “RST” Thursday morning.

The strong pricing of this I.P.O. shows how hungry the market currently is for growth companies. While most consumer oriented companies are happy to simply make estimates these days, Rosetta Stone has been growing its revenues mightily the past few years. In 2008, RST’s revenues grew 52% to $204 million, with net income of $13.9 million.

While these numbers are impressive, one has to wonder why insiders are selling 3 million shares in this I.P.O. If business is poised to keep growing, why would they be selling so much stock themselves?

Even with these insiders ringing the register, I still think the stock is a buy Thursday on the opening as long as you can get it for under $20. With the market devoid of many niche growth companies, look for institutional investors to jump right into RST on the opening Thursday and for a quick move into the mid-20s by next month.

While it is not the next Google (GOOG) or Netscape, buying RST for under $20 Thursday seems to offer a good risk/reward on a trade that will not blow up on you and should provide you with quick upside as the market rewards any and all companies that are able to grow nicely through this recession.

Disclosure: I am not long the stock but will be Thursday morning as long as I can get stock for under $20.

Comments

[User 380128:]

what is expected 2009 eps for RST?

Apr 16 10:42 AM

[David White:]

Good call. However, RST opened at $25. It hasn't gone that much lower or higher since. In addition the performance of IPO's this year (and last) has been terrible. RST may be a great company. Still going on the recent IPOs' track records, it seems the odds are stacked against making a profit in an IPO this year, especially if you are buying it for nearly double the original asking price.

Apr 16 02:43 PM

[Investutopia:]

I see web content translation and pronunciation as the future of language especially pronunciation. My blog is capable of being translated into a few languages and allows me to read my post in the translated language with some pronunciation as a starting point Wikipedia and other sites could rapidly develop language learning for free.

Apr 16 03:42 PM

[lemoneater:]

I'm not surprised that Rosetta Stone has been so well received by investors. It is not a fly-by-night company that nobody has ever heard of. RST advertises very aggressively I've spotted it in several magazines, on different websites, and the local mall has a booth. Also disclosure I work for a small textbook publisher and along with our own materials our sales reps sell Rosetta Stone. This language learning product is quite popular among the homeschooling market which itself is a growing customer base.

Apr 16 04:35 PM

[raytayzmd:]

...I don't see it...they're in a market crowded with competition...a market, moreover, with little in the way of barriers to more competition...perhaps even more important, do a quick web search and you'll find you can download eveything Rosetta makes for FREE...granted, it's pirated...but still...break the law versus shucking out $549?...ummmmmm -- I dunno...I can't see investing in anyone whose product can be stolen with the click of a button.

Apr 16 05:57 PM

[Daniel Harr...:]

raytayzmd:

"...I don't see it...they're in a market crowded with competition...a market, moreover, with little in the way of barriers to more competition..."

That's true, but then again, so was Google when it launched & later IPO'd (and oddly enough, right in the middle of a downturn, too). It's not about a market crowded with competition if you have the bulk of the customers. RS has exactly this.

Plus, the growth potential of the industry is enormous; perhaps one of the highest around right now. Increasingly, foreign languages are becoming more widely necessary in business/general travel, as is learning from home.

Apr 16 06:20 PM

[user225084-...:]

It should be illegal to float an IPO until all relevant financial information, are available on a multitude of financial web sites such as Marketwatch, Bloomberg, Yahoo and Google.

The data must include historical revenues, hsitorical earnings, size of offering, share totals and float, and number of unvested options.

The SEC should be responsible for enforcing the above requirement.

People buy into these IPOs without even reading the S-1 registration statement, basically "investing" blindly based on momentum and hype.

Apr 17 04:03 AM

[Windsun33:]

I think this could be a future buy. Overpriced I think out of the gate, but if/when it drops down below $18 I will be looking at buying.

Apr 17 07:19 AM

[johngonole:]

Strongly agree with the commenter above. It is very hard to get the IPO information before the actual IPO. I suspect that this stock as with most IPO's will trade below the IPO price a year from now. Even before the market implosion this was true on average. I can't remember the percentage but a high percentage of IPO's will trade lower one year later.

I don't think this should be a surprise either. Remember the people selling the shares know the most about the company. At a minimum they are only going to sell for the amount of money they think the company is worth. If interest is not there they simply pull the IPO. Sometimes people pile into familar names like Rosetta, Build a Bear, Google, etc...

So ironically often the best time to buy the IPO is one year later.

Apr 18 01:39 AM

[Windsun33:]

It has been on a declining trend for the past couple weeks, I think it has a good future, but that future ain't yet.

Apr 22 11:14 AM