Rosetta Stone Inc (NYSE:RST), is a USD$224.42M small-cap, which operates in the software industry based in United States. Innovations such as augmented reality, machine learning and autonomous vehicles are paving the way for tech sector growth. Tech analysts are forecasting for the entire software tech, industry, a relatively muted growth of 6.11% in the upcoming year, and a robust short-term growth of 29.65% over the next couple of years. This rate is larger than the growth rate of the US stock market as a whole. Below, I will examine the sector growth prospects, and also determine whether RST is a laggard or leader relative to its tech sector peers. View our latest analysis for Rosetta Stone
What’s the catalyst for RST's sector growth?
The battle for competitive advantage has led businesses to adopt new the cutting-edge technology, or risk being left behind. Many technologies are now coming into their own as their power and speed increase and the cost of delivering them goes down. And some are pursing growth through various strategies including new M&A, collaboration and alliances, as well as cost reduction and organic growth. In the previous year, the industry saw growth of 9.59%, beating the US market growth of 4.49%. RST leads the pack with its impressive earnings growth of 67.05% over the past year. Furthermore, analysts are expecting this trend of above-industry growth to continue, with RST poised to deliver a 13.25% growth over the next couple of years.
Is RST and the sector relatively cheap?
The software tech sector's PE is currently hovering around 42x, above the broader US stock market PE of 22x. This means the industry, on average, is relatively overvalued compared to the wider market. However, the industry did return a higher 13.69% compared to the market’s 9.99%, which may be indicative of past tailwinds. Since RST’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge RST’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? RST’s industry-beating future is a positive for shareholders, indicating they’ve backed a fast-growing horse. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto RST as part of your portfolio. However, if you’re relatively concentrated in tech, you may want to value RST based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If RST has been on your watchlist for a while, now may be the time to enter into the stock, if you like its growth prospects and are not highly concentrated in the tech industry. Before you make a decision on the stock, take a look at RST’s cash flows and assess whether the stock is trading at a fair price.
For a deeper dive into Rosetta Stone's stock, take a look at the company's latest free analysis report to find out more on its financial health and other fundamentals. Interested in other tech stocks instead? Use our free playform to see my list of over 1000 other tech companies trading on the market.
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The author is an independent contributor and at the time of publication had no position in the stocks mentioned.