LeapFrog’s 15 Minutes in the Spotlight is Over… Again

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It’s got to be frustrating, for the company as well as shareholders. LeapFrog Enterprises (NYSE: LF)the maker of the once-red-hot handheld Leapster reading system – looked like it was making its way back into the hearts and minds of its target market. As quickly as the company became relevant once more, though, a batch of new competitors has up-ended the effort.

And it’s more than just a bump in the road.

This year started out as a good one for LeapFrog. Though 2010 and 2011 were both profitable for the children’s electronics company, a lack of growth in the shadow of huge demand for the latest competing handheld gaming devices from Nintendo (NASDAQOTH: NTDOY.PK) and its peers didn’t help LeapFrog’s numbers. But, with the introduction of the Leapster GS (which was named 2011’s toy of the year) and more recently, the kid-tablet computer called the LeapPad 2 (yes, a decent web-enabled tablet that can download and play apps, as well as take pictures), sales-growth was looking up again. So was the stock, running up from $5.60 at the end of last year to a peak of $11.76 just one month ago.

So what happened to send shares back to a low of $8.08 just two weeks ago? News from Toys “R” Us gets the credit, but there’s much more to the troubling story for LeapFrog than just the toy store chain. The catalyst for the selloff was news that Toys R Us was unveiling its own 7-inch children’s tablet computer called the Tabeo, which pulled the rug out from underneath the enthusiasm that had built for the new LeapPad tablet just weeks after it made its debut.

The Toys “R” Us version is not only bigger, but better; it boasts a 1Ghz processor, 1 GB of RAM, and 4 GB of storage, all for $150. And it’s powered by a special version of Android 4.0 – the same Google (NASDAQ: GOOG) operating system powering several other tablets like the Nexus 7. This version of Android 4.0 also offers parental control.

For comparison, the LeapPad 2 also offers 4 GB worth of storage, a comparable processor, a camera on the front and back, and only costs between $99 and $129, depending on the package. Unfortunately, the LeapPad 2 doesn’t offer wi-fi access to the internet, other than app downloads (which clearly has a child-safety aspect to it), and it’s built on LeapFrog’s own operating system. Needless to say, there’s not a big third-party app ecosystem for the LeapPad 2.

Were it just an either/or issue, LeapFrog might have a fighting chance to rekindle its glory days in the world of children’s electronics. For parents who are comfortable they can keep tabs on their children’s internet usage via a tablet, the Tabeo gives them a tool/toy kids can grow into as they mature. And, for parents who simply want total control and are ok with limiting the potential app downloads to the 325 or so offered by LeapFrog, the LeapPad 2 is a good fit. It’s not an either/or choice, however, which is why LeapFrog is right back out in the cold. 

As it turns out, the Tabeo isn’t actually the world’s first full-blown children’s tablet computer to come complete with web-access tools. That honor belongs to the Fuhu Nabi, which was actually (and ironically) sold exclusively through Toys “R” Us stores last year.

The Nabi isn’t a bad machine; the most recent version runs Android 4.0 on a quad-core processor, and offers up to 8 GB worth of storage, for a price of $199. For all intents and purposes, it’s a better machine than the Tabeo, which is why it costs $50 more. You’re just going to have a tough time finding one, since Toys “R” Us dropped the Nabi device when it came up with its own branded version. As a matter of fact, Fuhu is suing Toys “R” Us, saying the toy retailer stole its trade secrets juststo it could make and market its own children’s tablet.

But the Nabi and the Tabeo still aren’t the only tablets or tablet-oriented competition LeapFrog needs to worry about though. Ever heard of a company called Little Tikes? The company makes several kinds of toys, but most recently has delved into the world of – you got it – tablets. The iTikes line of electronics turns several versions of the Apple (NASDAQ: AAPL) iPad into a digital paint pad, a piano keyboard, a Microscope display-screen, and a map. Of course, they need an iPad to work, which means Apple’s got to be gloating a little. Indeed, if the iTikes Map toy works, Tim Cook may be interested in buying the company.

Great, but what’s any of this got to do with LeapFrog?

It’s conceivable that LeapFrog’s LeapPad 2 could compete with the Toys “R” Us Tabeo. The former is more of a toy, and the latter something of a tool, and to each its own. It's not just competing with the Toys “R” Us device, though. LeapFrog is also competing with Fuhu, and, indirectly, Apple.

Parents – who ultimately pay for their kids toys – are apt to start weighing the cost/benefit and lifespan of all of these handhelds. What they’re going to see with a LeapPad is a toy that has little in the way of expansion possibility as the child matures. Without access to web-browsing beyond the limited access to LeapFrog’s apps, there’s not a lot of shelf-life for the device either.

On the other hand, parents can get a lot of shelf-life, as well as the possibility of upgrades and expansion, with the Tabeo and Nabi, and most likely any other children’s-oriented tablet in the pipeline. Or, in the case of Little Tikes’ iPad accessories, what better excuse to go ahead and splurge on a premium tablet that will be plenty relevant and functional for at least a few years?

The bottom line is, LeapFrog looks like it’s right back where it was when it was losing out to cooler handheld technologies. That’s likely to crimp its investment value until its next generation of technology is unveiled… which could be a while.

Or, of that doesn’t convince you, then maybe this will – the LeapFrog website offers iPhone and iPad versions of some of its learning and gaming software. The iTunes store doesn’t offer LeapPad apps.

LeapFrog’s got a lot to chew on here.

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jbrumley has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple, Google, and LeapFrog Enterprises. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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