In the words of Warren Buffett (Trades, Portfolio), “The best investment you can make is in yourself,” as "the more you learn, the more you can earn." Therefore, education is a valuable commodity. Despite the education system mostly still being classroom-based and government-funded, there are still some ways for investors to get exposure to the education industry, primarily through the stocks of online education companies.
Online education, also known as education technology or "Ed-Tech," is an industry that was accelerated by the lockdowns of 2020 as people were stuck at home and university buildings were closed internationally. However, even with the acceleration of the pandemic, the long-term trend would have been for more online education because it saves time and money. Therefore, it's no surprise that the global Ed-Tech market was worth $85 billion in 2021 and is forecasted to grow at a rapid 15% compounded annual growth rate, reaching a value of $230 billion by 2028, according to estimates from Valuates. Thus, let's take a look at two stocks in this industry which have had their stock prices beaten down despite still growing revenue.
1. Coursera
Coursera (COUR, Financial) is the largest online education company in the world with 55 million visits per month. The company is known for its strong partnerships with leading universities such as Stanford, Imperial College of London and University of Pennslyvania. In addition, Coursera offers a range of courses from tech giants such as Meta Platforms (META, Financial), Alphabet (GOOG, Financial)(GOOGL, Financial) and IBM (IBM, Financial) which cover a variety of subjects from software engineering to data science and many more. These partnerships provide unique products and give Coursera a competitive advantage.
The fact the courses are online means students can learn at their own pace and for a much cheaper cost than the price of courses at physical locations. However, unlike just binge-watching YouTube videos, these courses offer a better structure for learning with reputable teachers.
Growing financials
Coursera reported solid financial results for the fourth quarter of 2022. Its revenue was $142 million, which increased by ~24% year over year. This was driven by strong user growth as the company added 22 million new registered learners and had a total of 118 million by the end of 2022. Its Paid Enterprise customers also rose by over 1,000 as the company partners directly with businesses to offer upskilling and education to employees.
Coursera has also introduced “credit eligible” filtering, which means courses can be selected based on which ones offer credit towards a college degree.
Moving on to profitability, the company reported a gross profit of $88.9 million, which rose by 24% year over year, at a solid 63% gross margin.
Its operating expenses showed signs of operating leverage as they decreased as a portion of revenue from 83% in the fourth quarter of 2021 to 70% by the fourth quarter of 2022. However, the company still reported a GAAP operating loss of $45.9 million, which was only slightly better than the operating loss of $47.5 million reported in the year-ago quarter.
A positive is the company has a strong balance sheet with ~$780 million in cash, cash equivalents and marketable securities, with low debt in comparison, as shown by the cash-debt ratio of 54.02.
Valuation
Coursera trades at a price-sales ratio of 3.1, which is significantly cheaper than its five-year average. The enterprise-value-to-sales ratio is 1.46, which is also cheaper than historic levels.
2. Udemy
Udemy (UDMY, Financial) is an online learning platform which operates with a different model to Coursera. Rather than partnering with universities, Udemy connects students to individual experts in various disciplines.
The courses on the platform include many related to coding, business, finance, marketing and more. Unlike lengthy degree programs, these courses are bitesize and extremely cost-effective, with many selling for just ~$20. This means no student debt or expensive payment plans. It also means no degree, but that doesn't really matter if you already have a degree or just need specific training for a job or to start your own business.
Udemy takes a large 50% commission of instructor-defined course fees. However, if the instructor sources the student independently rather than through its platform, Udemy only takes a 3% cut. The company also offers a personal plan with a subscription model.
In addition, Udemy offers a B2B offering which offers upskilling for workforces, with clients including, PepsiCo (PEP, Financial), Lyft (LYFT, Financial) and Booking Holdings (BKNG, Financial).
Udemy has recently partnered with technology services provider Capgemini to help with promotion. According to a study by Udemy, its customers reported a five-fold increase in upskilled employees with 30% higher productivity and recruiting cost savings.
Growing financials
For the fourth quarter of 2022, the company reported $165.3 million in revenue, which increased by a rapid 22% year over year. This was driven by solid multi-year deal growth for its business segment, which increased by 129% year over year.
Approximately 80% of its total revenue is derived from exclusive course content, with 200,000 courses on its platform and 4,700 new courses added each month. This gives Udemy a competitive advantage over others, as its syllabus is continuously updated by its crowdsourced model, which adapts to current trends. For example, in its fourth quarter earnings call, the company noted 150 courses had been added recently in the field of artificial intelligence (AI). The crowdsourced platform model should also keep the content costs super low for Udemy in comparison to other players.
The company reported a solid 29% year over year increase in gross profit to $94 million. Its operating expenses have also shown signs of operating leverage, making up 72% of revenue in the recent quarter, an improvement of 75% in the year-ago quarter.
The company reported a loss per share of $0.16, but that still beat analyst expectations by $0.07.
In addition, Udemy reported a strong net dollar retention rate of 115%, which means customers are sticking with the platform and spending more.
Udemy has a strong balance sheet with $466 million in cash and short-term investments compared to $13.5 million in total debt.
Valuation
Udemy trades at a price-sales ratio of 1.99, which is cheaper than its historic levels. The company also trades at a price-to-free-cash-flow ratio of 4.84, which is cheaper than the industry median.
Final thoughts
Both Coursera and Udemy are fantastic companies that are poised to benefit from the growth in the Ed-Tech industry. Coursera’s competitive advantage is its strong university brand partnerships and content quality, while Udemy’s competitive advantage is its crowd-sourced model and rapid update cycle. Given Udemy is trading at a slightly cheaper valuation, and has a more efficient cost structure, I personally like it better over Coursera.
