Shares Rosetta Stone Inc surged as much as 32 percent Friday, a day after the language-training software maker posted a strong quarterly profit, as investors cheered the solid growth in its international business and the push toward a recurring-revenue model.
The company's international business nearly tripled and contributed to 11 percent of total revenue in the fourth quarter.
In 2010 Rosetta expects the international business to contribute 13 percent to 15 percent of total revenue, up from 8 percent in 2009.
The company expects full-year revenue of $286 million to $299 million. Analysts were expecting $279.6 million, according to Thomson Reuters I/B/E/S.
International business was ramping up faster than it expected and the acceleration of growth made the company's target of 30 percent to 50 percent contribution more achievable by 2014, Morgan Stanley said in a research note.
The brokerage, however, said its estimate conservatively remained in the mid-teens as it remained concerned about the predictability of Rosetta's business.
Morgan Stanley also eliminated its price target on the company's stock because of the volatility of Rosetta's shares.
Rosetta's shares are heavily shorted, with interest rising to more than 16 percent of the total float as of February 12. By comparison, blue-chip technology stocks such as Google and Apple have short interest positions below 2 percent.
Investors who sell securities short profit from betting stocks will fall. Short sellers borrow shares, then sell them, waiting for the stock to fall so they can buy the shares at the lower price, return them to the lender and pocket the difference.
Jefferies & Co, which sees the international opportunity as larger than the domestic U.S. opportunity, said while the transition could dampen earnings growth this year, free cash flow would be strong.
Jefferies raised its rating on the company to buy from hold and its price target on the stock to $29 from $24.
Shares of the Arlington Virginia-based company, which debuted in April 2009 at $18, have lost almost a fifth of their value in the last 6 months. They were trading up 26 percent at $21.90 in late morning trade on the New York Stock Exchange, having touched a high of $22.87 earlier in the session.
(Reporting by Sayantani Ghosh in Bangalore; Editing by Unnikrishnan Nair)