1 Stock to Buy in May

Every month, I pick out one stock that I'll be putting my own money behind. I've been doing this for almost two years, and these monthly picks have returned 21%, beating the S&P 500 by 4 percentage points! 

This month, I examined five stocks to purchase. Click on any one and you can see my reasoning.

Facebook   Starbucks   Baidu   Rosetta Stone  LinkedIn  

From these five, I will be purchasing shares of Rosetta Stone  (NYSE: RST  ) , as soon as Foolish trading rules allow. Read below to see what I expect from the company moving forward, and what I'll need to see to determine if my investment will succeed.

A broken strategy acknowledged
One thing to understand about this company is that under previous management, Rosetta Stone's sales strategy was wildly ineffective. How many people can honestly say that they'll make a $650 impulse buy from a kiosk while walking through a mall or airport? Though they may have done a good job spreading Rosetta Stone's brand, these kiosks were hardly the best platform for the company to be offering their goods.

I have a friend who, wanting to learning Chinese, simply found someone to Skype with in America who spoke Chinese and wanted to learn English. They spoke once per week, switching between the two languages to teach each other... for free.

Google's YouTube could offer up much the same service. And McGraw-Hill and Disney also offer paid-for language-learning tools for far less than Rosetta Stone's CDs.

When such alternatives are available, why spend the time and money on expensive CDs?

Leveraging the quality of the offering
But when former CEO Tom Adams left the company and Steve Swad took the reins, things started to change. This April, the company announced it was closing all of its kiosks and moving its language-learning program to the cloud.

That's key, as the company can use different -- and more affordable -- price points based on a subscription model rather than an expensive one-time purchase. Indeed, whereas subscriptions accounted for 17% of revenues in 2010, they accounted for a much larger 34% in 2012.

Equally important, Rosetta Stone recently acquired rival Livemocha, a company that was offering up free online language-learning lessons. As fellow Fool Rich Smith points out, Rosetta only paid $8.5 million for Livemocha, but the company acquired 16 million members from the service. Do the math, and you'll see that that's a tiny $0.53 per member that Rosetta is gaining access to.

Combining these two factors, Rosetta is using the fact that language-learning is its core as an advantage.  Disney, McGraw-Hill, and Google all have bigger fish to fry than focusing on this segment of their business; for Rosetta, it's all the company has, and that's a good thing.

The program works
I'm also partial to Rosetta Stone from personal experience. My wife and I moved to Costa Rica three years ago and continue to travel back to volunteer each year. Though I speak Spanish conversationally, my wife did not.

After trying both in-person lessons and Rosetta Stone, she's convinced that Rosetta Stone -- combined with informal practice with native speakers -- far outweighs typical foreign language classes. And with the acquisition of Livemocha, there's already a platform available for informal practice.

Moving forward, I hope the company can leverage the effectiveness of its software in two key areas: the international and institutional markets.

For much of the world, English has become the lingua franca -- or universal language with which to communicate. A cheaper, cloud-based language-learning solution offered to an international audience is a huge opportunity, but it accounted for just 15% of revenue in 2012. There's lots of room for growth.

And institutional customers, particularly cash-strapped school districts facing shortages of foreign language teachers, also represent a huge customer base worth capturing. In 2012, institutional clients only accounted for 22% of revenues -- again, this represents a huge avenue for growth.

What it all comes down to will be the ability of Swad and his team to do three things:

Streamline and monetize the Livemocha acquisition. Ensure that the cloud-based experience is as user-friendly as possible. Convince international and institutional customers of the value proposition offered (and unrivaled) by Rosetta Stone.

How I'm buying
Right now, Rosetta Stone is in a turnaround stage. The product is great, but even though the new strategy looks promising, it's also untested. I'm only devoting one-twelfth of my Roth IRA money this year toward Rosetta -- which works out to about $450.

If you'd like to read up on five companies that I've invested far, far more money into, I suggest you check out our latest special free report: "Who Will Win the War Between the 5 Biggest Tech Stocks?"  Inside, you'll get details on the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.