None of these companies was a breakout star in their inaugural year on the public markets, and that could be a sign that each faces tough sledding to grow and capture market share.
If growth investors aren’t excited, value investors might. Coursera valuation shows upside potential of over 100% at the time of research but is that top of the pile or do Udemy or Duolingo offer even more potential?
The EdTech Market: A Snapshot
The edtech market size is esimated at about $106 billion and is predicted to grow at a compounded annual growth rate (CAGR) of 19.9 percent through 2028, according to Grandview Research.
As tuition increasingly straddles both in-class and virtual learning environments, edtech is a hot growth area for the coming decade. For investors, picking a single winner can be tough so a Warren Buffett-style strategy may be best. Here’s the skinny on what that means.
When Buffett invested in airlines, he knew that any given airline poses significant risk to an investor. But after years of airline bankruptcies four companies came to dominate the market in the U.S.
Buffett’s investing solution?
Buy all four airlines. If one airline fell on hard times, at least one if not all the other three would scoop up the business.
In short, buy exposure to the industry and reduce risk to any given stock was his strategy. Similarly, edtech may be a space where picking a winner is tricky. But owning the giants of the industry that capture the majority of the market share means if the overall industry is slated to grow at almost 20% a year, the diversified investment can be tethered to the industry growth rate vs a single company’s fortunes.
Udemy’s Financial Outlook
Udemy is a San Francisco, California-based open online course provider founded in May 2010. The company’s early-stage investors Tencent Holdings, Naspers Ventures, and Groupon investors, Eric Lefkofsky and Brad Keywell. By the end of 2021, the platform had over 46 million students and 60,000 instructors teaching 175,000 courses in 75 languages.
Despite its global reach, the company still hasn’t turned a profit, losing -$69.70 million in 2019 and -$77.62 million in 2020. Its 2021 fiscal year should end with a -$30 million loss on over $510 million in revenue, which it grew from the prior year by about 24 percent.
While cash outlays have been fast and furious during its growth phase, Udemy pulled in $421 million during its October 2021 initial public offering (IPO) on the Nasdaq exchange.
The company has major corporations using its platform, like Apple (NASDAQ:AAPL), Glassdoor, and The World Bank.
When combined with its gross margin of 82 percent, the company has ample opportunity to turn a profit when it dims down spending on revenue growth and focuses on bottom line growth instead.
Like Coursera, Udemy has massive upside potential. A discounted cash flow analysis reveals upside to the tune of approximately 98%.
Is Duolingo Stock a Buy?
Duolingo is a language-learning platform launched in Pittsburgh, Pennsylvania in 2012 with a freemium business model across its website and app. It provides courses in 40 languages and is especially useful for English-language proficiency exams.
Since launch, it has accumulated over 500 million downloads and is the top-grossing Education app in both the Google Play and Apple App stores.
By the third quarter, the company had 41.7 million monthly active users.
Of its 9.8 million daily active users, 2.2 million were paid subscribers. This drove $73.1 million in total bookings, a 57 percent year-over-year increase. That translated to a gross profit of $45.5 million and a net loss of $29 million.
Now that it’s deflated by 50 percent from its IPO highs, Duolingo could well be a deal under $150. By applying a discounted cash flow forecast analysis, Duolingo appears to have upside to the tune of 70%.
It’s a market leader with consistent growth, and language-related software is estimated to be a $25 billion market by 2026, so it represents a significant chunk of the expected $67.26 billion education software market by that time.
Can Coursera Stock 2X?
Coursera was launched in 2012 by two Stanford professors. The company grew to 92 million registered learners thanks to collaborations with 250 university and industry partners.
Coursera continues to show monumental growth, almost doubling its user base since 2019. Even heading into the pandemic, it was growing at a rate of over 20 percent each year. If it can sustain partner growth the future will be very bright.
The stock is trading at half of its IPO price, and that means there’s a massive upside potential. Buying the dip could lead to 2x over the next few years if it simply realizes fair market value.
EdTech Risk Factors
Although each of these EduTech stocks has shown phenomenal growth over the past two years, the growth rate in remote learning users may not be sustained.
Students are already leading the charge in returning to on-campus learning, as attending university is considered a rite of passage for many. The in-person networking opportunities as important as the class lesson plans.
It’s also hard to ignore that each is trading considerably lower than its IPO price as insiders sell their shares to capitalize on the IPO buzz.
Best EdTech Stock to Buy: The Bottom Line
Each company has a roughly similar market cap and is trading for a deep discount on its IPO price. They all have great growth potential, and it may be a good idea to diversify your bet across all three.
Coursera leads with connections to both enterprise and academic institutions. It also has higher upside potential than Duolingo and Udemy, though all three represent upside opportunity to the tune of between 70% and 104% based on a cash flow forecast analysis. If you had to pick one, Coursera is trading at the deepest discount but exposure to all three offers a Buffett-like approach to gaining exposure to the industry’s rapid CAGR that is forecast over the next decade.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.