Stocks to Short #3: Leapfrog Enterprises (LEAP)
Leapfrog Enterprises (LEAP) never felt to me like a sustainable business. My kids never took to their products, and they always seemed to be buried under other more interesting toys at the homes of fellow parents.
Although net income has been on the rise over the past few years, LEAP is faltering this year. The balance sheet is fine with no debt, and free cash flow is OK. The problem really comes down to valuation — I just don’t see paying 20x earnings for a company with limited growth prospects, and that is struggling amidst tremendous competition from tablets that also can entertain kids, such as iPads.
I don’t like LEAP, and neither should you.