yudeng2004

Check out the Investment Ideas board I started a LeapFrog thread there.

I eventually learned that "EDU-tainment(education through entertainment)" is different from "pure entertainment". If it was all about childhood entertainment, parents could actually just get a Nintendo Gameboy - specifically made for that purpose and better than any tablet out there with the best games. But LeapFrog's origin is in childhood EDU-tainment - they were the leading brand in this niche even before the LeapPad came out . Their products are specifically designed to teach language, math, writing skills in an entertaining way. You see the LeapPad has a Pen that comes with it, whereas the iPad mini or android are touch-screen based. The reason is because LeapFrog offer apps designed by their education experts specifically for teaching writing skills. Now how would you teach a kid writing skills with an iPad? The apps on LeapFrog are made from their many years of experience in producing children education materials. It has a lot of proficiency tracking system that tells the parent how much progress their kids are making in reading, writing, math, or foreign language skills. From a usage perspective, you can view the LeapPad as "digital tutor". You can put your kid in a room for 2 hours, and not worry about them breaking it or just wasting time playing Angry Birds. You know this product frees you up by occupying their attention for 2 hours, but you also feel safe at heart knowing that the apps on there are made by education experts with years of experience, and is designed to help your kid learn. You can keep track of their learning progress. You also know that EVERYTHING on LeapPad is meant for EDU-tainment, and you will not need to scan through hundreds of apps from this over-bloated Apple or Android appstore just to find the few you trust your kids' education with. On a recent Bloomberg interview, the first thing the CEO mentioned was the deteriorating quality of childhood education in developed countries. He said LeapFrog's foremost focus is to improve childhood education in an entertainment way. LeapFrog already dominated this niche even before LeapPad came out, but the tablet turned out to be the most ideal form factor for delivering EDU-tainment. The LeapPad is really a continuation of what they have always done. They do not see themselves as a toy company, and is very clear about what their core values are. I don't think you will see them try to make dolls or action figures anytime soon. They are a very very focused company sticking to their core value proposition. I hope this clears more things up about the actual niche that they are in, and the commanding brand they already have in this niche. As for the faddish nature, it's totally understandable where you are coming from. I think that's where one has to decide for oneself "is children tablet market itself a fad market". If you think so, don't invest in anything related to kid tablets. If you think this market is here to stay for the foreseeable future, I would say LeapFrog has a commanding position in this segment. G/L investing.

It's the LeapPad and the content ecosystem. Most of the profit is likely to come from the downloadable content - which quadripled in sales. I seriously doubt they make much money on hardware. Disney is publishing some digital interactive books on the LeapPad, they probably view it as another outlet for their content. LF allow some 3rd party content creators make content for the LeapPad if they feel it is good for their audience. Hasbro has a deal with LF too, but not sure of the details. I think Disney/Hasbro/Mattel view LeapPad as another outlet for their branded content. Maybe they will create some Barbie-themed app or game for the LeapPad.

It's been two years, both the InnoTab and LeapFrog has had two iterations. And I keep on stressing that from surveys and sales results, its not about the tablet itself. It is about how parents shop. Did InnoTab win any parent choice or industry awards? Does it have more reviews and better reviews from consumers? That's what I am stressing, is that the more reviews you get -> the more buyers -> more parent choice awards -> more reputation -> more buyers -> more reviews -> more rewards. In a niche market that is like child education, most parents will not go and spend the time reviewing every app, every tablet. They can make an easy choice with LeapFrog. I predict that even if Tabeo and InnoTab are vastly improved and becomes better than LeapPad this year, the LeapPad will continue to crush them because of the fact that it won yet another 2 major awards just two days ago, has a faster review rate gain on Amazon, and is increasing their brand value in parent's mind faster than the competition. It's not about who can make the best tablet, it's about who can increase their brand association with child edu-tainment the fastest, and LeapFrog is smoking the competition right now. You should listen to the webcast - it's not just about the LeapPad - all of LeapFrog product lines are increasing and solidifying this reputation in parents' minds. They are the leading brand in this niche. Everything LeapFrog does is geared toward the message"By buying our products we guarantee you the best child edu-tainment experience for your kid" as opposed to "By guying our products we give you the most features for the least bucks". The more I research the more I realize how prudent their core strategy is. I don't see how this is any different from what say Nike does with shoes or Coca Cola does with soda, there will always be cheaper and better alternatives, especially for Nike. But Nike is not a shoe company, what Nike sells is "cool". Coca Cola is not a drinks company, what it sells is "happy experience" LeapFrog is not a toy technology company, it sells the best "child edu-tainment experience". Whoever wins this niche is not someone has the best features for the cheapest price, it is someone who has the best reputation and brand associated with child edu-tainment. When I used to work at Microsoft, the product teams were all about "more features for cheap price" and they would look at Apple and say "I can't believe people are willing to buy that thing, such a ripoff" and they got smoked by Apple. It might be counter-intuitive at first glance, but the "more features for cheap price" is generally a pretty crappy consumer proposition except to geeky gadget lovers. You might be not be convinced about LeapPad and you might think it is a ripoff. For most others - they want to be sold something - and multiple "Toy of the Year" awards, tons of reviews is an easy sell. Of course you may not see it that way, that's what makes a market.

1,2,3) It is possible that within 2-3 years you will be able to buy an android tablet for $100 or less. The RIM tablet was on sale for $200 this last year. You can buy a smart-phones with a cameras and 3" screen for $100 today. We can debate the timing but prices will continue to decline on these devices and this will push the price of the leapfrog products down. 4) Competitors will design tougher devices. As well there are already materials that protect an ipad/android tablet, these will likely get better as time goes on. Tougher tablets will have a market beyond children's use, people are going to want to take their tablets with them just in general. Manufacturers will respond by making sturdier versions. In addition there are hundred of thousands of apps for android. The selection for leap frog producs is much more limited. Many android apps are free, most are $3 and under. Charging $25 per title just isn't going to cut it. Already the video game industry is getting whacked and being forced to find alternative sales methods, I think the same thing will hit leapfrog. I think there will be a lot of educational titles, if there aren't already on android going forward. The products you mention were already out there this past holiday season, one was the cheaper InnoTab 2(and this is already a 2nd generation product) at 79 specifically geared toward children, it is 20 bucks cheaper and had similar capabilities compared to LeapPad 2. Last fall Toys R US, a major toy brand, introduced their android-based tablet called Tabeo for 149, it had all the good stuff Android offers, and who is better than Toys R US to introduce a new toy? The sales result was the LeapPad 2 was constantly sold out. Also please read the entire thread, in the latter posts I addressed why LeapPad sells out against the competition. The hardware is not what makes the money anyways, it's the content. You say charging 25 is not going to cut it - this past Holiday season parents could have gotten the Android-based Tabeo and get all these free to low priced education software from the Android app store - that was not enough to entice them away from LeapFrog products. It wasn't because LeapFrog spent a ton of money on marketing either - they pulled their marketing early in November when they realized they were going to have great sales this Holiday season and saved a bunch of advertising dollars. I am confident that most parents make decisions based on: number of reviews and review score, awards won, and overall brand association with child education, as opposed to the other factors you mentioned. I am also confident that value investor parents, with their habit of research and comparison, are likely to make decisions based on the factors you mentioned. Actual sales data and survey results prove that they are in the minority. The majority of parents do not make decisions that way. Value-for-money is great for picking stocks, not so great if you want to understand various consumer behavior. When it comes to education-related decisions, value-for-money is not how most people think. Just look at college tuition as rising percent of income and the rising student debt. Just two days ago at the Annual Toy Fair, the toy industry introduced the "People's Choice Toy of the Year" award for the first time (previously all awards were chosen by experts in the industry). LeapPad was the first winner of this award ever. They won the industry award for Best Education Toy of the Year as well. They just increased their brand value and mind-share. Next holiday season when people shop for children tablet, they see more awards, more reviews for LeapFrog products vs all these unknown products out there. It's an easy decision for them. I am convinced this is all about mind-share and come next holiday season we'll see if I am right.

Management have sandbagged their guidance every quarter the past 2 years by a lot (they must think beating guidance can get their stock higher, but when they sandbag to the point of inaccuracy, it just adds to more confusion). On average LF beat analysts expectations by over 20% the last 2 years. They will have a lot more than 10% growth, they are going after international markets this year heavily, French, Germany etc etc. Management need to realize that guiding accurately is a good way to build faith, it's not good to confuse people either way. They won't be paying taxes for a few years, and you don't have to use the tax benefit in the multiple. However, do realize the tax they are not paying means it goes to the balance sheet. So just subtract the tax benefit for the multiple, then realize by Q1 of 2014 they'll likely have more than 300 million of cash on their balance sheet.

Leapfrog Analyst Presentation webcast happening right now: http://edge.media-server.com/m/p/8b63ox5z/lan/en There are some good stuff in there, key emphasis here is they are entirely focused on Child Education. That's just a niche they dominate and nobody else is even close to their brand in this category. I think it answers a lot of the concerns people have about competitors - remember those guys are general Toy companies, not education focused.

You can somewhat use Millennial Media as a comparison and the gap is not justified, thus I believe the opportunity exists in Velti since sentiment is at the absolute bottom. Velti acquired CASEE in China, which is the largest mobile ad network in the country - http://www.casee.cn/mm/Help.ad?_m=aboutEn For conservative valuation purposes, you could discount this now. They also acquired Air2Web, which is one of the largest mobile marketing companies in India, you could discount this also. Just treat these acquisitions as free call options as Veltis current major markets are US/UK. However China/India mobile ad market are entering years of hyper-growth so they'll be worth more later. While Velti has all these subsidiaries in different countries, valuing them as sum-of-parts would be wrong way to look at this company. The true value of Velti lies in the fact that that they integrated their global end users into a single platform for their advertising clients called mGage. This allows a major global brand to run a truly global campaign, targeting any area of the world it wants to, with full and integrated analytic services for all these different countries. Coca Cola, for example, can reach mobile audiences in US/Europe/China/India with a single, integrated campaign through Velti's platform, with full analytics and fine-tuning services. Velti is very well positioned here because this is a network effect game. More global end users => more brands => more money for application developers => more end users => more brands. Take a look at this announcement to see the value Velti adds to a global brand (in this case Subway): http://www.velti.com/press_release/jul-28-11.html As Velti's network effect increases, it becomes harder and harder for new competitors because this a chicken-and-egg problem for newcomers. Major global brands are still in the beginning stages of doing mobile advertising, but imagine someone like Coca Cola: they are all about mind-share and with people spending more and more time on mobile devices, it is inevitable that Coca Cola will make sure people see them somehow on their mobile devices. They could choose Velti to help them do this, as Ford, Macy's, Starbucks, Subway etc has already done. But I want to go back to what I said earlier - Velti will eventually be bought out by a big name like Microsoft, Google, FB or someone else. Take a look at the Velti's board member David Rosenblatt - he was the CEO of DoubleClick before they got bought out by Google. Velti has a huge global mobile audience all reachable under a single integrated technology platform, and mobile advertising is the biggest market tidal wave since the beginning of web advertising. Microsoft/Google/Yahoo/FB etc all wants a turf in this area - they have no choice because this is where their growth will come from. I am sure David Rosenblatt can help Velti out here. This acquisition is gonna be at more than 1x sales, that I am certain about.

The Good: Velti(VELT) is a mobile advertising company in the hot growing Mobile Advertisement Industry which is projected to grow from the estimated 11 billion in 2013 to more than 24 billion by 2016. We are using our tablets, smartphones more and more for all kinds of computing, and mobile advertising market is one of the fastest growing markets in the world. I am sure this growth potential is not hard to see for most of us. Velti(VELT) is one of the leaders in this space, with a customer list that includes the likes of Starbucks, Verizon, McDonalds, Macy's, and a boatload of other global famous brands. It has a 90%+ customer retention rate and just scored the biggest single contract ever at 27 million in the mobile ad industry with a major US brand. You may find presentations, investor meeting recordings here: http://investors.velti.com/events.cfm (I REALLY suggest you read the slides) The Ugly: If you look at Velti's 2 year chart, you notice that it way off the highs it reached in the past - due to management problems, a focus on the Balkan countries where receivable collection has been very problematic, pressure from wall street, not knowing how to communicate with wall street, and a favored target of aggressive shorting. The main problem Velti had in the past was they took on terrible contracts in Eastern European/Balkan Region countries in order to aggressively grow their revenue, and those countries have VERY LONG cash collection cycles often numbering 270+ days. So while VELT grew their revenue and earnings rapidly, their cash flow was negative and got in trouble. Wall street constantly harped on their cash collection problem, and finally Velti management decided to start doing more business in the US and UK last year. In fact, more than 70% of their revenue in 2013 is projected to come from US/UK, where collection cycle is around 90 days. To completely get rid of their past association with the Balkan region, Velti decided to sell their businesses in these troubled countries last year, but at a fairly low price - which Wall Street didn't like - and the stock got clobbered again since it will have a negative short-term impact on their revenue and EBITDA. Then 2 weeks ago, something even more crazy happened - the new CFO they brought on board to fix the problems at Velti re-iterated the already-known fact that selling of the old businesses were going to negatively impact EBITDA, and Velti will use this as the year to reposition themselves in the better markets of US/UK. The result was Velti shares got clobbered again (so for the same reason twice). It also doesn't help that you can barely understand the CEO when he talks with a heavy accent, and is of no help with regard to clear communications. But despite all this - for the first time in years - Velti is now poised to be cash-flow positive. The Future You may wonder at the irony of Wall Street for punishing Velti for their bad contracts in the Balkans, and then punishing them again for getting rid of the very contracts they complained about, but that's where the opportunity to invest in Velti at a low price is created. Analysts have aggressively slashed their revenue and EPS projections for Velti this year, and now consensus EPS stands at around 0.61. Now if you dig a little deeper, you begin to see that Velti is actually doing the majority of their businesses now in the US/UK and also had acquired one of the top mobile ad companies in China. It has gotten rid of its Balkan roots, and while earnings growth in 2013 will be small or non-existent due to selling the old business lines, it is now well-positioned for the massive growth that remains the mobile ad industry. The way I look at this company is that it sits at the epicenter of this massive industry trend, as big a trend as search ads or the beginning stages of internet advertising. It trades at around 1x sales right now and likely will have EBITDA of 40-60 million in 2013. I think the worst case scenario is someone like Yahoo, Microsoft, Google, FB or whoever else that wants more turf the mobile advertising space (there are a ton of large players who will want to get in) to buy them out at a huge premium - like Google buying up DoubleClick. So I would look at Velti more like a Netflix or Amazon type of investment from say a few years back, where they are a top player in this inevitable trend. And as long as their revenue growth continues higher and their cash flow problems don't come back again, they are poised to rise dramatically. Eventually, there will be a huge turf war in this space between the big players and Velti will be a prime takeover target. I am going against my value investing grain here by saying that for this particular company, as long as they can stay cash flow positive while growing the top line, earnings won't matter. They will have the "paradigm shift" premium, and sooner or later some big player is going to start acquiring companies like Velti to gain market share in mobile advertising. I also think the huge short interest at over 30% of float, will be a huge catalyst for price-appreciation in the future. The reasoning here is pretty simple - you do not short a top company operating in the EARLY stages of a massive, inevitable industry trend if you are not convinced it is going bankrupt soon. You risk seeing the stock going vertical on you when people realize: it is not going bankrupt now that its business are primarily in the US/UK, is one of the leading companies in this huge growing space with huge brands customers and 90%+ customer retention, and is always a potential take-over target. This sort of reminds me of Fairfax back in the days when it went under 100 and I was telling myself "the only catalyst necessary here as long as we don't get Katrina/Wilma again it's going to the sky". We can't say Fairfax went from a troubled company to a great one when it went from 100 to 300. But what happened was Fairfax went from being perceived as certainly bankrupt to being just OK - it's all about expectations. I believe a similar opportunity exist for Velti right now - it is near the maximum point for negative sentiment, and a slight change in perception will be all it takes.

The Bezos effect - it's puzzling isn't it, considering that great value stocks today actually have growth, and often GREATER growth than the bubble stocks. I think if someone is crazy enough to pay 100 PE for 50% growth, and say 5-10 PE for 0-10% growth, then it's understandable to some extent. But when they pay 500-1000 PE for 8-30% growth, and 5-20 PE for 20-40% growth. That's when I check if I accidentally took some pills or something. So they want to pay MORE for LESS growth in earnings?? Anyways we probably will get that blow-off-top then our opportunities will emerge. Netflix may move to 210 simply because everyone is looking at it and says "It's in a perfect Pennant Formation!" and it will be a self-created reality. I see a lot of people out there who are saying they will buy Netflix until 200-220 then they'll short it because of the Pennant Formation -> Blow Off Top -> Crash pattern. And it may actually happen because they all believe it.

I noticed some patterns in this current market sentiment, and found it kind of interesting: Look at these particular names and how similar their financial profiles are: Apple (AAPL) - huge cash pile, 8x PE after net cash, low debt, STILL has growth left since the smartphone market itself is not done growing, CRASHED after earnings. Baidu (BIDU) - huge cash pile, 18x PE after net cash, low debt, grew revenue 40% latest quarter, and China's internet penetration is still only at 42%, and search is still by its nature a very wide-moat business, CRASHED after earnings. LeapFrog(LF) - huge cash pile, 4.5x PE after net cash at end of Q1 2013, still the leader in the growing children's tablet market and won more toy awards this year than Mattel/Hasbro/VTech combined, CRASHED after earnings. Notice how the above companies' financial profiles are still insanely good but their growth prospects went from "HOT" to "Decent" but is no longer at the forefront of a "Paradigm Shift". Then take a look at these companies: Netflix(NFLX) - huge debt with boatloads of off-balance-sheet content obligations, creating their own VERY expensive shows (which is a hit-based business), top-line growth actually not that great. LOW return on equity/assets. Amazon(AMZN) - low margin, and actually LESS than 25% growth and slowing, HUGE capital expenditures, low return on equity/assets SalesForce(CRM) - has growth, but it's very expensive growth at the expense of income. But these companies all scream "Paradigm Shift" and now really reminds me of the Internet Bubble craze where no price was too dear to pay for the changing nature of business models. Do you guys feel the market is behaving like VC's right now? They want companies to spend, spend, and spend more to catch the "Paradigm Shifts" and the price paid does not matter. The ironic part is the companies in good financial shape still have decent growth prospects ahead of them, just without the "Paradigm Shift" label. BIDU had more revenue growth rate than Amazon, Netflix, and SalesForce. The capital flows of this market is turning increasingly speculative. It thinks one group of companies is taking over the world, and the other group will soon die. Of course, this trend might diverge further but I think the current state is the most divergent we have seen in years. It'll be interesting to see how much further the divergence will continue!

I spent the last 2 days doing more research so I can answer your questions more thoroughly. Here is the quick take: 1) This is definitely not a fad 2) LeapFrog has strong competitive advantages 3) Mattel/Hasbro threat is actually not that material, other concerns trump this competitive concern 1) This is not a fad The biggest concern people have with LeapFrog is that it seems like a "fad" product company - after more research and some mental exercise I concluded this is simply wrong. The way I thought about was first asking the question "Is the children's tablet market itself a fad?". The answer clearly is no - while children's tablet market is BROADLY CATEGORIZED under toys - it really is a segment of child edu-tainment. People made the mistake of thinking this is just a new toy, and next year the kids will love some other kind of toy - that's because this is being compared to pure toys like Barbie or Lego - which is wrong. To me, children tablet is actually the new trend and ideal form factor for child edu-tainment and is clearly a growth market in this category. I think children tablets are here to stay for the foreseeable future, but if you believe children tablets is a fad market in and of itself, then don't read on and don't invest in LeapFrog. Now we have established that children tabletis the new trend that's here to stay, let's look at: 2) LeapFrog's competitive advantages in this new market and what made them the leader An online survey on Squidoo asked parents the most important factor for choosing a child learning tablet, the top factor was High quality educational software(38.4%)" and "Good range of inexpensive apps to download (24.2%)". What about technology/hardware? We have Long battery life(4.2%), Lightweight and easily portable (3.2%), Ability to play your own videos(9.8%), Support for SD media card for additional storage (1.8%). So parents are mostly concerned with the quality of education their kids can get, and tech/hardware doesn't matter to them. This led me to the next mental exercise "If I were a parent, how the heck do I determine the quality of education software?". I think this is where LeapFrog shines and where we can draw parallel to what Buffet said about how parents choose to buy a Disney video for their kids. Let's pretend that Mattel/Hasbro actually came out with their own tablet just for this exercise sake: Imagine you are a parent shopping for a children tablet, you go on to Amazon or Walmart, and on there you see this one product - the LeapPad 2 - that has many times more reviews than the next best thing in this category. You see that it won Toy of the Year in 2011 and 2012 in the child education category. You see that it won the People's Choice award for 2012 Toy of the Year. You see this intro about the brand "LeapFrog learning games, apps and eBooks are designed by our in-house educational experts and grounded in the latest research for the richest possible learning experience", and with a little more research you find that it has won a boatload of industry awards AND parent choice awards for child edu-tainment. Then you see this other tablet - the InnoTab 2 - that actually has similar hardware capabilities as the LeapPad 2 AND IS CHEAPER - but isn't as decorated in awards. Then you see a brand new tablet from Mattel/Hasbro that doesn't have many reviews since it is new, but you may know Hasbro/Mattel from famous brands like Barbie, Monopoly, and GI Joe, and Jurassic Park games. Now imagine the most simple subconscious thought happening here for shoppers: "From the makers of Barbie/Monopoly/GI Joe comes this new tablet for kids - you can do so much with it!" "From an innovative company comes the next generation of child tablet the InnoTab 2 - cheaper than any other tablet of similar capability!" "From the leading child edu-tainment brand with numerous industry and parent choice awards, comes the winner of Education Toy of the Year 2011 & 2012, People's Choice Best Toy of the Year 2012 - the LeapPad!" I did this mental exercise with myself then asking several people - because I am certain the above is the most key and blatant message most people end up forming in their minds - and I now understand why LeapFrog has been leading this category and will continue to lead this category. For every award they win, for every "best-selling" they can put in their title or description, their brand and mind-share expands (It just won yesterday yet another Education Toy of the Year and People's Choice Toy of the Year(any category) at the 2013 Toy Awards, so it actually INCREASED ITS MIND-SHARE & BRAND didn't it?) Again I go back to Buffet: he said people will not watch every video out there to select the best one for their kids - so they buy the Disney one based on brand. The InnoTab 1 and 2 were out there as the cheaper alternative of LeapPads. Then the iPad Mini - technologically superior and many children prefer it, not cheap but not back-breaking either - was out there this Holiday season. Then LeapPad still marches on to record sales and had constant shortages. Cheap alternative - could not stop it. Technologically superior - could not stop it. But this confirms the results of the survey earlier - that technology, or even cheapness, is not important here. Mind-share and brand is more important, evidenced by the fact that LeapFrog pulled its advertising campaign earlier in November because it realized LeapPads were going to sell out and they didn't even need to spend all of its ad budget. You know what is the mistake we have all been making debating about the LeapPad and its alternatives? We are assuming people want to make a choice (and we are investors so we do this all day, we compare and we dig and we research). But guess what? MOST PEOPLE WANT A CHOICE TO BE MADE FOR THEM. Think deeply about what goes on in most parents' SUBCONSCIOUS when they see words like "Best-Selling", "in-house educational experts", "Education Toy of the Year", "People's Choice Toy of the Year" . Put yourself in THEIR shoes and drop your habit of conscious comparison and research, It's not so hard to see the competitive advantage now is it? 3) Mattel/Hasbro threat is actually not that material, other concerns trump this competitive concern Mattel/Hasbro are conglomerates that own various unrelated toy product lines. They are like Electronic Arts for video games or Proctor & Gamble for household items. So just because they are huge and big players in the BROAD toy market, doesn't give them any advantages in the new growing segment of children tablets. Would you say EA has any advantage over Blizzard for making massive online games when Blizzard was making World of Warcraft? EA had way more sales and profit than Blizzard before WoW came out. Would you say P&G has any advantages over a particular product category like say men's deodorants? Can P&G really stop the rising popularity of Axe deodorants? So what gives Mattel/Hasbro - makers of Monopoly, Barbie, GI Joe and other famous physical toys - any advantage at all over LeapFrog in the category of children tablets? Or even more important - which existing brands that they own can they actually leverage here? Barbie? Monopoly? Now compare: Company A is small and has focus and history on interactive child edu-tainment products, with numerous industry awards and best-sellers in this category Company B is huge and has various famous brands of physical toy product lines in all sorts of categories. Now how exactly does B have an advantage over A for this new market segment? In fact, shouldn't we instead be asking Mattel/Hasbro the question - what exactly is THEIR competitive advantage here? Why are they MORE UNIQUELY SUITED for this category than LeapFrog? My answer is I don't think they are. Now comes the size question - is the bigger player at an advantage over a smaller player? I don't think so either because for this category, it's about the brand of edu-tainment, as opposed to the technology, it's not like Intel vs. AMD. It's also not like say Netflix or Amazon where you must pay huge upfront costs to establish your competitive position. LeapFrog has 200M of cash, that's plenty for this category they are the leader in, in fact they didn't even need to spend all their advertising budget this past quarter, they sold out before they ran through the ad budget. If LeapFrog is now trying to compete on a different turf like say Lego or something, that would be different. But LeapFrog is not playing the "who can become the biggest toy conglomerate" game, so the capital and size issue here is irrelevant. The real concerns I have with LeapFrog are: 1) They are slow on international expansion thus they may allow some foreign copy-cat to be first-to-market in their local turf. 2) Another concern I have is LeapFrog should test lowering the price of some of its apps, since the survey said that abundance of cheap apps is 2nd most important factor after the quality of the education apps. They should do more testing of volume vs price and I am sure they can do a better job before sticking a 25 buck price on some of their apps. They might realize they can get more revenue through more copies sold. 3) They are too conservative with inventory after they found out last November that LeapPads were going to sell out. If they already knew that, why not order more inventory? They say some of that sales is being made up in Q1 now, but that's BS since not everyone make up holiday gift shopping in Q1 because they probably chose to buy other gifts when they couldn't get a LeapPad, so some of those Q4 sales are lost forever. The CEO himself said that they did leave some revenue on the table - that's just poor execution. 4) They don't do stock buybacks when valuations gets low. Apple is setting a poor example here and maybe they consider Apple their idol or something. It's just stupid not to do it when your valuation get that low and you have so much cash you can't actually spend. I suppose some execution leeway should be given for leading such a new market. But still, I am sure a more seasoned management could have done a much better job of optimizing the returns! I wish some activists sit on their board and forced buybacks too. I hope I have answered your concerns and feel free to poke at this from different angles.

What about the trend that tax break is over and discretionary income will be down? I think these macro trends take decades and other factors trump them. I went back to read short thesis, forums, shopping guides all the way to the 2011 comparing iPad, then iPad mini, to LeapPad, I think we are making the mistake of making this a "Either this OR that" fight. We are putting them in the same ring even tho one is a Toy Tablet with an education focus to it, has a low baseline cost, and is tough; the other is a more capable all-purpose tablet that is more expensive, is delicate (even with the casing it's not safe from child's temper tantrums is some parents' reviews), and can grow with child since they would still be able to use it when they get older. Are these really the same market segment? LeapPad 2 and its competitor's products were all out there this past Holiday season, how come LeapPad 2 still sold out like nuts? I mean we can dig up arguments either way but how come the actual sale numbers show that LeapPads were in great demand even with these other products out there? I am guessing we could say these people must be nuts and not making a great purchase decision and will soon regret it. But then I go read the reviews on Amazon and Walmart, I just cannot conclude from the reviews and the actual sales data that iPad mini is a LeapPad killer. It's just interesting to me that we are not discussing say market saturation, growth potential left etc etc, but we are discussing why LeapPad may fail against these other products - but these other products were all out there this Holiday season, how come LeapPad 2 broke records and had constant shortages? The reviewers on Amazon and Walmart must be nuts or paid by LeapFrog? I would like to invert my investment thesis, so I would like to hear an argument against the latest sales data.

They were a different business from 2003 to 2010, completely different types of products and service model back then. A lot of their margins now comes from content and software distribution, which they didn't have back then. Take at look at Netflix - which went from a mail-order type of business to a streaming business, so looking at historical data on Netflix doesn't make a lot of sense, and wouldn't for LeapFrog either. For these companies you have to look at their current market and the future. I don't think LeapFrog's new business model is nearly as volatile as their historic model, they'll keep upgrading to the next generation of their new product lines - LeapPad 2 -> LeapPad 3 etc etc and make money from content and software distribution. For the valuation, it's because this entire market is growing, we are at year 2 of the children's tablet market transformation, and Leapfrog just got started on international operations. 7x for me is conservative if you take into account that this entire market is growing rapidly for the next few years. For the threat of competition, I think that's dependent on your own views there. I don't see any evidence the competition is doing so well, but if you think they are a big deal you could of course assign a lower valuation, that's what makes a market.

I think the CEO addresses some of your questions here: http://www.bing.com/videos/watch/video/leapfrog-tablet-apps-are-made-for-kids-ceo-says/2jivhj67t?from= He mentioned that LeapFrog's apps are all made by child education experts, and Leapfrog's products are award-winning child education products. This is a competitive advantage since we are not talking about say, a video game app here where it's all about having the most fun. For kids, we have to think about which products has the best chance to increase their learning, instead of just letting them play angry birds all day long. A well-developed child education app is like a tutor in a sense, were you let them spend time and you know they are getting a good use of their attention span. Leapfrog products has built-in features that let parents track of their child's development progress. It offers peace-of-mind that the child is learning something with their time. To your first point on consumer product comparison: Well, the evidence would simply be the incredible sales LeapPad has and continue to have. But to address the links you mentioned, choosing between Leappad, iPad Mini, and Kindle Fire has a lot of people preferring the iPad Mini. The main arguments for iPad mini would be: a) your kid can grow with it since it has functionality and variety even a 10+ year old or even yourself could use. So most parent would make a decision to buy an iPad mini for their pre-schoolers with the idea that they wouldn't outgrow it? While I think rational and long-term thinking parent would think about this (which would be most value investors because this is how most value investors think), I seriously doubt the majority of parents think 5 years down the road when they buy a toy for their pre-schoolers. To most parents, Leappad 2 is just a toy they can let their child to spend time with and know the material on there is safe and specifically made for children. I think over time I learned that on consumer forums, the people on there are the type who do extensive research and active forum participants are generally not representative of the crowd. I actually bought a LeapPad 2 for my 5 year old nephew for exactly this reason. I don't want to spend too much time on this research, it was 99 bucks and the reviews on Amazon was great, there were hundreds of reviews. So I bought it. I did not go through the "find a consumer forum, talk to people, plot out actual cost, think about 5 years down the line" thinking process. But this is MY POINT OF VIEW, so I think for this question you have to decide yourself which type of people is more representative: A) those who are sophisticated enough to research about those things or B)are they people like me who don't want to think about these things. Remember we are value investors and we have a tendency to be biased toward arguments that are rationalized and ignore the fact people generally are not optimal when they make purchases. Convenience > optimization for most people. Heck I got a Kindle PaperWhite for my uncle and I know the Fire HD is a better value proposition and he already has an iPad. I know he likes to read and PaperWhite is superior for reading and worse at everything else. So what? It's not something am gonna spend time to debate over. He'll have uses for the PaperWhite from time to time and that's enough. There are plenty of people like me as evidenced by PaperWhite sales. So instead, why don't we just follow reality and look at the fact that Leappad 2 is often sold out and has great reviews at Amazon and Walmart? Does the imagined rational debate paint a clearer picture or does the actual sales record paint a clearer picture? b) the ipad mini is 329 + 15-30 apps at 0-5/each would be the same cost as LeapPad 2 at 99 plus 15-30 apps for the LeapPad 2 at 5-25/app. I have some counter-arguments to this: 1) what if I only have 150 to 200 bucks? I can't even buy the Mini. 2) initial low cost of 99 is a great purchase incentive, that's human psychology. It's cheap at the purchase time. 3) if I buy this as a gift, 329 is a lot to pay 4) Ipad mini is a delicate device and I would hate for a kid to break it (even with a casing the mini is not specifically made for taking a beating). Breaking the mini = lost 329. Whereas breaking a Leappad 2 = lost 99. When handing a toy to a kid, a lot of people will think about the downside more than the upside. The mini may offer more upside if you can afford it, but it is also more risky. And what about people who don't even know you could get a casing for the mini? How much does the casing cost? Again - that's just more things you have to think about for a purchase. To conclude - am not taking my value investing habits and projecting it toward how people make purchase . Thus I would avoid shorting say LuluLemon or Chipotle, as I believe consumer demand is the best evidence, as opposed to rationalized arguments. On your 2nd point about Mattel/Hasbro competition: To decide Mattel/Hasbro can easily duplicate what Leapfrog has done is to me pure speculation. Those two are traditional toy companies, and have not yet demonstrated their capabilities in this area. So what can we use to decide whether they can or cannot compete in this market? Toys R US is as big a toy brand as there is, with huge distribution, and their Tabeo tablet based on Android can't stand a fight againt LeapPad. That's what happened. Could Mattel/Hasbro eventually take over this market? I have no clue, and I can't speculate either way. I just know for a fact that they are behind and Toys R Us has failed so far. I will just admit am not smart enough to know these things. But my experience observing market paradigm shifts does not give me much confidence in lagging big companies. I mean look at Kodak sailing off the cliff when the digital age came, or Nokia and Blackberry with the smartphone market. Or even Walmart vs Amazon - heck Walmart pioneered the modern day supply chain management system, with their own trucking network, satillites, the 2nd biggest database in the world after the Pentagon - all they had to do was build a website. Now in HINDSIGHT, we could say well of course Walmart couldn't have competed against Amazon, it's not just about building a website. But back then without knowing the future, you could easily make the argument "Amazon will just die if Walmart built a website". People said this about Itunes econsystem too in its early days, they said well Microsoft can easily crush Itunes ecosystem with their media centers or XBox network or whatever. I mean these are all fair arguments and I don't have the answers to them. I tend to not have a lot of trust in big companies who fall behind, but that's just me. I just know what am seeing now, which is Leapfrog is executing better than all of them. If you find any evidence that show Leapfrog can be crushed by Mattel/Hasbro/ToysRUs etc, I'd like to know as well, since that would certainly be a real dent in this investment thesis and I would need to think about it more. But the reality is we won't know unless we actually see these other companies execute. So I'll focus on what I do know. On your point about valuation: 2012 EBTIA was more than 90 million, this year will be higher, likely 110 million or so. At end of Q1 there will be 200 million on the balance sheet. International sales are growing rapidly, up 38% last year, and they are really focused on international expansion of their products this year plus introducing next generation of their products. They said they don't expect new product development or operation expansion to have any impact on their margins in the latest conference call. Realistic: 18/share at 9 x EBTIA + cash at end of 2013. Conservative: 15/share at 7 x EBTIA + cash at end of 2013 Optimistic: 25/share at 12 x EBTIA + cash at end of 2013