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Blue Nile (NILE) & Rosetta Stone (RST), Great Companies But Disappointing Stocks

November 09, 2011 | About:
Peter Boodell

Intelligent Speculator

6 followers
I’ve heard it several times. The best way to find a stock is to look around you, find a company that you deal with in every day life and depending on your opinion of that company, the service that you get and other such things, you might just find a great investment. Why? Because you will own a company that you know a lot about. I’m not a big believer in that argument. Knowing a company is important, but there is little relationship between how well a company treats me and where it’s stock is headed. You’d like to think that there is, but it’s just not true. A few years ago, I had every man’s dream come true. Through friends of friends, I met an incredible women that I became friends with before eventually starting to date her. To make a long story short, one thing led to another and after a few years, I was ready to commit. As is usually the case, two main things that were missing for me were:

-Buying an engagement ring!!

-My wife actually saying yes:)

In order to get the first part done, I ended up shopping in quite a few physical locations but when the time came to buy, I trusted Blue Nile (NILE), a company I had heard good things about the company and was able to find exactly what I was looking for. The service, communications and actual ring were all beyond expectations and she ended up loving the ring and saying yes:)

Since my wife’s family is Japanese, being able to communicate better with her family and to eventually help our kids learn to speak was very important for me. I did end up looking into quite a few programs and ideas but in the end I settled on using Rosetta Stone which I have been using ever since. It’s not easy and there are many different ways to get it done but for me, Rosetta Stone (RST) has been amazing. It’s not perfect but has helped me a great deal and I would highly recommend the service. I’m not saying that I’m fluent (very far from it, but I am improving!).

Great Company Does Not Mean Great Investment!

If you have looked at our past long and short tech trades, you have seen that I have been short both of these names. In fact, I shorted Blue Nile (NILE) 4 times this year alone and all trades were winning ones and once on Rosetta Stone (RST) which also turned out well. I did not go long these names at all. In fact, I have probably been more negative about Blue Nile than any other company on this blog.

TickerNamePriceEPSPE RatioPE Next YearReturn YTDSales GrowthAnalyst ratingBook ValueBeta
NILEBlue Nile Inc48.810.9847.8032.69(20.42)10.182.853.591.39
RSTRosetta Stone Inc7.010.65N/AN/A(66.82)2.6237.960.77


Why Has Blue Nile Been Such A Great Stock To Short?

Every time I’ve traded NILE, it has been based on valuations. I always look at NILE’s P/E ratio and for some reason, it is always being priced as if the company was a high growth company. Just take a look at how Blue Nile has been trading in terms of P/E when you compare to its growth which has been unspectacular.



With such P/E ratios, you would expect very impressive growth right?… Wrong:



Nice growth… but compare the same charts for a company like Apple (AAPL) which we have been long very often (not always successful but most of the time it has been!)





Nothing can explain such a huge discrepancy in my opinion.The main thing that seems to happen is for analysts and investors to consistently anticipate growth to pick up. It might happen at some point but it just seems like despite the fact that Blue Nile is the leader in the online jewelry sector, its brand has not been strong enough to get a large number of buyers to make such a purchase online. Many people shop for big purchases like rings, cars and houses online but how many actually close the deal online? A lot less than you could think and that will likely remain a long term obstacle to Blue Nile’s growth.

Since NILE announced earnings after hours, this chart looks better than it really is. NILE was trading at $41.50 after hours… will update the chart later on.



What About Rosetta Stone (RST)?

Rosetta Stone has a strong product and seems to be able to do well with its users but it seems to depend so much on its advertising budget that it puts a severe limit on both revenue growth and earnings. If a huge proportion of buyers are purchased through ads that end up being very expensive, the only way to increase revenue growth is to increase marketing spending which hurts the margins while cutting down on marketing spending could help profits but would likely put pressure on growth. It’s actually a similar story to Groupon (GRPN) in my opinion. The stock has been in free fall with no stop in sight.





Obviously I have been wrong on other names, even though 2011 has been an incredible year in terms of returns. But for these 2 cases, even though I like the companies, I can’t imagine and never considered going long on these names, if anyone is a stockholder and/or a believer in these stocks, I would love to hear your bull case. I do understand that at some point their valuations will become attractive but right now, those charts and numbers look depressing. If you would like to read more of our thoughts about tech stocks, we have a free newsletter sent every 2 weeks or so, sign up here:

Disclosure: No positions on NILE or RST


Rating: 3.8/5 (6 votes)

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