The following article covers a teaser ad that has just started to be run again by the Motley Fool. Our article was originally published on February 2, 2011 when the ad first started to run, and the ad is substantially the same but the article below has not been updated or revised so some of the numbers below are quite out of date (the answer to the tease is still the same, of course).

The stock teased is far below where it was when the ad first ran 18 months ago, but has doubled since the lows of this past winter. The company has not posted a profit this year, but analysts believe it will do so next year. We’re including the full text of the original article and the full text of the original comments about the company, since readers posted a great many substantive comments on this one.

Well, whaddya know — this must be “Motley Fool Week” here at Stock Gumshoe. A couple days ago we looked at some of their teaser stocks for their flagship Stock Advisor newsletter … and now they’ve issued a “Special Report” obliquely teasing yet another pick.

And it’s a pretty good tease, too, with relatively few clues — but your friendly neighborhood Gumshoe does love a challenge. So let’s see who this is, shall we?

The “special report” on this stock is being sent to new subscribers to their newsletter — they call this report “One Breakthrough Company with the Key to Global Commerce,” so they’re not exactly being shy.

The stock teased is a pick of David Gardner’s, the more growth-focused and technology-happy of the Fool brothers, and it is, once again, for the Stock Advisor newsletter that he co-writes with his brother Tom. There’s plenty in the ad about his great success with long-term investments in stocks like Marvel and Amazon.com, but I went over some of that earlier in the week. Suffice to say that he likes rapid growth companies that are “top dogs” and “first movers” in their particular market, and he likes them even more when Wall Street is skeptical or when people think they’re overvalued.

Here’s the lead-in to get you excited:

“A small Northern Virginia company (with key patents and a team of bulldog lawyers) has discovered a way to provide a “a bread necessity” in places like Mumbai, Hong Kong, and Mexico City…

“While at the same time, replacing centuries old institutions in cash strapped American states and towns, and even U.S. government agencies.”

Intriguing, no? It continues. This stock is apparently a …

“… ‘first mover’ and already ‘top-dog’ in a $80 billion-a-year industry… with giants like Google now trying desperately to get a piece of the action”

Then we get a littany of clues about this company’s product:

“This company’s remarkable product is nearly 35% faster than existing alternatives ….

“… has achieved 7 times the name recognition of its nearest rival …

“… far superior product costs consumers (individuals, companies, along with both private and public institutions) 20% to 50% less than alternatives … with high gross margins of over 85% …

” … The company makes the vast majority of its revenue through direct sales — its website, call centers, and kiosks — and is expanding that retail presence around the world….”

So that sounds pretty impressive, no? Especially the 85% gross margins part … but nary a clue about exactly what kind of business they’re in (as you’ll see in a moment, any clue along those lines would instantly reveal the “secret” for most investors).

There’s also a connection to the states and their budget crises, which is timely — the teaser notes that …

“… on Wednesday, January 19 a sizable new contract was announced in Evansville, Indiana. The deal shakes up an old-fashioned public institution, saving the state a ton of money, and providing it a product five times better (according to one vital measure) than the existing alternative…

“And then there’s the monumental shakeup in New Jersey. You might have seen it reported on the evening news. In June of last year, this company’s breakthrough product REPLACED a centuries-old process and provided a better product for 80% less cost to the state!

“USA Today noticed, reporting that this breakthrough company “has become wildly successful”… and quoting a bevy of world-renown business experts who state unequivocally that this company’s product plays a “crucial” role in the future of global commerce!”

And Dave Gardner thinks this product might be 10X better than existing alternatives, and could become one of the major stock stories of this decade. So who is he teasing?

First, we need a couple more clues:

“According to Nielsen research, the worldwide market for this company’s product is over $80 billion. The United States represents just a small fraction of that, with around $5 billion. Yet this company makes about 80% of its revenue here, meaning there is a huge and largely untapped source of international growth.

“Last quarter, this company’s international sales rose more than 115% from a year earlier. The company makes the vast majority of its revenue through direct sales — its website, call centers, and kiosks — and it is expanding that retail presence in Europe and Asia.

“Its patented approach itself makes this growth easier because the system is adaptable to many markets.

“Even in the United States, there’s plenty of room for growth. The company’s $263 million in revenue over the past four quarters gives it a small share in a fractured market, but it’s rapidly gaining ground. Altogether, its revenue has grown at a 40% compound rate over the past three years.”

So now that’s enough to definitively name the stock for you — this is Rosetta Stone (RST), one of the more widely covered IPOs when it went public a little less than two years ago, very near the nadir of the financial crisis.

You’ve almost certainly seen their ads on TV and their kiosks in your local mall, but they basically provide language learning software — and yes, I’m willing to believe that second language learning is an $80 billion global business (though far larger and more commercial in China than probably anywhere else), and that foreign language acquisition is the “key” to global commerce, so the tease is a decent match conceptually.

But in the details, it’s a lead-pipe cinch — RST did record $263 million in sales over the last four quarters (OK, $262.9 million — rounding is allowed). Their latest quarter showed 119% year over year growth in international sales, which is not exactly 115%, but we’ll allow for some fudging there as well. And US sales did make up just over 80% of revenue, 83% as of the last quarter (and 93% a year ago, so you can see how the pie is changing).

And some New Jersey school districts did get quite a bit of national attention last Summer when they fired language teachers and gave the kids Rosetta Stone software to use instead. And Evansville did sign a contract with RST for a pilot program to expand language learning in their schools just a few weeks ago, as teased.

I remember being very impressed with Rosetta Stone’s marketing and branding a few years ago and looking to see if they were public (they weren’t at the time), but I didn’t get all that excited about the IPO when it came in the Spring of 2009 — frankly, the stock looked pretty expensive and it wasn’t a time when I was lunging for pricey growth stocks (though in retrospect, growth stocks were great buys back then — not RST, which is right around the $18 IPO price but well down from the $25 it actually traded at on the first day and from the $30 they hit shortly after, but growth stocks in general). Now that it’s had almost two years to “settle” in the public markets and give us a better idea of their ongoing financials, what do we think about the stock now?

Well, I don’t know about you, but I’m getting a little more interested. I haven’t dug into every filing by any means, but I am intrigued by a company with growing sales that has blown out earnings estimates in the past four quarters by a pretty impressive margin — often more than 50%, and trades at a premium to the market but not a particularly high premium (the stock changes hands for about 20X trailing earnings right now). Thanks to the IPO proceeds and to continuing cash flow generation, they also have a lot of cash — about $5 per share, so if you take out the cash as some analysts do the PE gets down to about 14, more of a standard market multiple.

For whatever reason (and RST does seem to have some challenges — heavy spending on marketing, some executive departures, and I’m sure others) analysts are forecasting that earnings will still not be up to the 2009 levels by the end of this year (they earned $1.22 in 2009, analysts expect 2010 to finish with 70 cents, and they forecast $1.05 in 2011). They’re also estimating 31 cents for earnings in the fourth quarter of 2010, which is the bottom of RST’s guided (and wide) range of 31-41 cents (at least, that’s the range they guided when they released the third quarter results).

The big question for Rosetta Stone seems to be whether they have a defensible market niche, and whether they’ll be able to continue to increase sales internationally and to institutions, including cost-cutting schools — that’s a question I can’t answer for you, I’ve never tried the product and certainly am no expert on the industry.

Morningstar’s analyst, as you might expect, is quite cautious compared to Mr. Gardner and pegs the fair value at about $20, noting that there is significant potential for competition from far larger software companies and that RST doesn’t have much of a “moat.”

And for what it’s worth, David Gardner did publicly share some more of his thinking about Rosetta Stone with another Motley Fool writer back in December. There has been pretty heavy coverage of RST and their challenges and opportunities in recent months, including a pretty good article in Barron’s in December if you want to get an overview.

So I’m getting a little more intrigued by RST these days, but I’ll need to learn a lot more about them (hopefully in English) before I consider investing. It’s your money that’s at stake though, so what do you think? Is this an unappreciated growth darling, or an accident waiting to happen? Something inbetween? Let us know with a comment below.