Investors Should Stay Away From LeapFrog

Summary

• 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

Fundamental slide

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.

Balance sheet

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.

Still innovating

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.

Conclusion

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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Maudes Capital]

Hello,

Thanks for the article.

What do you think about the merger?

Kind Regards,
Maudes

[William Bias]

Hi Maudes Capital,

I feel sorry for the people who bought the stock at above $1.00 per share.

Thanks for reading,

William

[Maudes Capital]

Hello Willam,

I cite your work in my new article. Let me know your thoughts.

Thanks,
Maudes

[William Bias]

I appreciate the attribution and kind words.

William

[User 24888963]

There is no recovery here. Last quarter company earned $8MM in gross profit and spent $39 MM . A huge not sustainable hole. The mid level managers (supply chain) still travel First/Business class between SFO and HKG, what the fudge! The current management are vultures and would not be satisfied till they have burn through the remaining $80 MM in cash.
and sent this company to bankruptcy.

[tradebr2010]

It looks like Value has been averaging down...

[tradebr2010]

This was from SA in Dec 23, 15:Leap Frog can use all the good press it can get: Shares remain down 84% YTD amid ongoing solvency fears. The company's market cap ($53M) is nearly even with the $52.6M cash balance it had at the end of September."

The stock was up 11%($.10!!!) due to a CR positive review on a $140 tablet.

I started following $LF at $12 with a potential $18. I guess it was minus $18 if it was possible!

[Value Investor Today]

Seems you're more concerned with the daily fluctuations of the stock price than the tangible sustainability of the brick and mortar business.

[tradebr2010]

There's no business. $LF has been sliced and diced since 2011, when the business started declining. You're just a little late to the party!
In many articles before this one, it was said the solution was a content development business with apps for all major devices. The great $LF device at $149 isn't worth if compared with ipads, fire, and the similar...
That was 5 years ago, and management has not executed in any type of cash preservation restructuring and product development in the content development area.
I'm a CFO, and don't waste time on fantastic recovery plans unless real action is taken.

[Value Investor Today]

I haven't invested in leapfrog. Far too many better qualifying candidates available currently. I specialize in turnarounds.

[Value Investor Today]

It's not a going concern business but it may have one more puff left.

[Stephanie26]

I think the problem with Leapfrog is that getting an expensive tablet for your child was not what most people wanted to do when they first came out, but now a lot of households have old tablets or smart phones (or you can buy a used one). When parents upgraded to a new version their kids could use their old one and there are so many educational apps available that are $10 or less. Many are free to download a small portion so parents get to find an app that they like at no cost. Compare this to the leapfrog games that are $25 and you have the little disk floating around that you have to keep track of which is only good for a specific generation of the product. The apps will stay in your itunes account and can be used on another old tablet for younger kids in the family latter on.

If the kids break the old tablet it isn't that much of a problem because the parents were done with it anyway. It seems pointless to buy another little thing when the kids want to play with the old phones and tablets much more anyway.

[William Bias]

Hi tradebr2010,

Thanks fo reading.

William

[tradebr2010]

Many articles have been written on this dead dog. In essence, a great brand with awful, terrible management(keeping the language clean!).

If management haven't been able to restructure the company in the past 5 years, I doubt the possibility now.

I'm sure someone will pick up the $LF brand once they file a ch 11 or even 7.