Rosetta Stone: More Downside in the Coming Months

| About: Rosetta Stone (RST)

Rosetta Stone, Inc. (NYSE:RST) offers learning programs for many different languages. In the past year, RST's shares have ranged from $12.57 to $25.66, so they are currently trading fairly close to the lows. Even at these lower levels, the stock appears to be overpriced and could see significant additional downside.

This is based on a number of factors, including disappointing financial results, forward earnings estimates, and a high price to earnings ratio. The consensus earnings estimates call for a loss of about 85 cents for 2011 and only a small profit of 37 cents for 2012. RST shares currently trade at around $14.70. Based on these estimates, even if you ignore the expected loss for 2011 and look forward to 2012 earnings estimates of about 37 cents, this gives a price to earnings ratio of nearly 40 times forward earnings.

The company recently posted financial results which saw a drop in revenues and losses. The press release stated that "the net loss in the three months to March 31 came to $9.3 million, or 45 cents per share, reversing a net profit of $5.0 million, or 24 cents per share, a year ago" and that "revenue fell 10 percent to $57.0 million from $63.0 million." You can read the full report here.

That same press release states:

For the second quarter, Rosetta Stone said it expects revenue of $61 million to $66 million, above the $60 million expected by analysts. It forecast a net loss of 41 cents to 62 cents per share, worse than the 7 cents per share loss expected by analysts.

Based on these results and the fact that high priced language courses are a tough sell in this economy, I expect that these shares have more downside in the coming months.

Data is sourced from Yahoo Finance. No guarantees or representations are made. I am not a registered investment advisor and do not provide specific investment advice. The information is for informational purposes only.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.