- Leapfrog’s stock price declined nearly 90% in the past 14 months.
- LeapFrog’s fundamentals suffer from lack of demand due to competition from other technologies.
- Leapfrog’s plans for product innovation may be too little too late.
A little over 14 months ago, I published my first article about educational entertainment company LeapFrog (NYSE: NYSE:LF) here on Seeking Alpha. The company sells hardware and software designed to help educate children. In my previous article, I talked about declining fundamentals due to a sharp decline in product demand as a result of competition and a difficult retailing environment.
I also highlighted its strong balance sheet, which provided a glimmer of hope for investors who wished to hang on to their shares. Moreover, LeapFrog's management asserted that it had a number of new products coming down the line. On that note, I said the company was worth watching due to its willingness to innovate. LeapFrog's valuation at that time resided in the low range, trading at a P/E ratio of 6, which raised an eyebrow with me.
At the end of the article, I also issued a word of caution to investors, warning them to keep an eye on degrading fundamentals. Since then, the fundamentals have degraded further, along with LeapFrog's stock price. Over the past 14 months, LeapFrog's total return amounted to a gut wrenching -89.3% vs 6.7% for the S&P 500 (see chart below). Let's examine.
LF Total Return Price data by YCharts
LeapFrog's fundamentals saw severe degradation so far this fiscal year. Its year-to-date FY 2016 revenue declined 34% year-over-year. Its year-to-date net loss expanded an incredible 234% year-over-year. However, its free cash flow deficit declined 40% year-over-year due a cut in capital expenditures.
LeapFrog's decline illustrates the risk of investing in technology-oriented companies. It appears that LeapFrog's products face obsolescence in the face of competition from the multitude of tablets out there which can carry educational software of their own. Customers simply don't want LeapFrog's products anymore and that spells doom for LeapFrog's shareholders. Long-term publicly traded business owners want to own shares in a company that sells products people need or desire over the long term. This is difficult to do in the technology arena.
In the most recent quarter, LeapFrog showed a cash balance of $52 million on its balance sheet, which represents 35% of stockholder equity. However, the cash balance represents a 53% year-over-year decline from last year, based on a stockholder's equity balance that shrank 63% due to accumulated deficits. One small bright spot: LeapFrog possesses no long-term debt to further compound its losses.
In the most recent earnings announcement, LeapFrog's management asserted that it will continue to innovate and create new products for its customers. However, lack of retailer support for its products may make it difficult to get those products to market. LeapFrog will really need to come up with an impressive product line to re-engage consumers.
Lower demand and retail support have translated into decimated fundamentals for LeapFrog. As an unfortunate consequence, LeapFrog's shareholders have seen the destruction of their wealth. The consumer is going to alternatives provided by a tablet saturated marketplace. Moreover, other tablet makers possess deeper pockets that enable them to fund innovation, marketing and other initiatives that can undercut LeapFrog. Current shareholders can hope that they can recoup some of their investment from a buyout. However, that represents pure speculation, not a viable long-term investment strategy. I'm taking my investing dollars elsewhere.
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