In-Depth Investment Thesis Update on Rosetta Stone

This article by MOI Global instructor John Lewis is excerpted from a letter of Osmium Partners, based in Greenbrae, California.

Rosetta Stone Inc.^[1], together with its subsidiaries, provides technology-based learning products in the United States and internationally. It operates through three segments, Enterprise & Education, Literacy and Consumer. The company develops, markets, and supports a suite of language-learning, literacy, and brain fitness solutions consisting of software products, Web-based software subscriptions, online and professional services, audio practice tools, and mobile applications. Rosetta Stone’s current market capitalization is approximately $513 million. The company generated $174 million in sales for the LTM ending December 31, 2018. (RST is a holding across all funds.)

Rosetta Stone (RST) stock popped from $15 to $21 in March on strong earnings guidance. At $15.30, RST was valued at only 5.7x 2021 operating cash flow guidance with 50% compounded annual operating cash flow growth. RST guided to operating cash flow growth of $19 million in 2019, $37 million in 2020, and $57 million in 2021, and we think 2022 will be near $75+ million a year. The market cap to start March was $325 million. Valuing RST at a 10x multiple of operating cash flow on 2021 plus net cash balance is $29.00 per share. Rosetta’s business model has transformed to a 100% SaaS based software company with currently over 5,000,000 paid subscribers and projected to grow by 700,000 to 1 million new subscribers per year. We think by 2021 it will be worth $40+ per share (we have a cost basis around $9). RST is currently valued at 2.0x sales, whereas at a public comp valuation of 7x RST would be worth $60+ per share.

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Certain factual and statistical (both historical and projected) industry and market data and other information contained herein was obtained by Osmium Partners from independent, third-party sources that it deems to be reliable. However, Osmium Partners has not independently verified any of such data or other information, or the reasonableness of the assumptions upon which such data and other information was based, and there can be no assurance as to the accuracy of such data and other information. Further, many of the statements and assertions contained herein reflect the belief of Osmium Partners, which belief may be based in whole or in part on such data and other information. The analyses provided may include certain statements, assumptions, estimates and projections prepared with respect to, among other things, the historical and anticipated operating performance of the companies. Such statements, assumptions, estimates, and projections reflect various assumptions by Osmium Partners concerning anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have included solely for illustrative purposes. No representations, express or implied, are made as to the accuracy or completeness of such statements, assumptions, estimates or projections or with respect to any materials herein. Actual results may vary materially from the estimates and projected results contained herein. Past Osmium performance is not indicative of future results. Osmium takes concentrated positions. Osmium Partners disclaims any obligation to update this letter. A portion of the Partnership’s assets may from time to time be invested in securities that have limited liquidity. The Partnership’s investment strategy is to make concentrated investments in what it views as its best ideas. The Offering Memorandum and Limited Partnership Agreement offers a comprehensive overview of the risk factors involved in investing with Osmium Partners. The information contained herein is provided for informational purposes only. This is not an offer to sell, or a solicitation to buy, limited partnership interests in Osmium. An investment in Osmium is not suitable for all investors. Graphs/charts are provided for illustrative purposes only and should not be relied on to form an investment decision. Stocks mentioned in the newsletter do not constitute a recommendation to buy or sell the individual securities.