Coursera: The Locomotive Of The EdTech Industry (NYSE:COUR)

Stock Market


photo on EdTech theme. wooden cubes with the words

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Investment Thesis

EdTech is a very underrated and promising industry. At first glance, it seems logical to expect a decline in the industry due to the return to offline education. But in fact, EdTech is much more than just teaching students and schoolchildren. It is a very large but undervalued industry that will continue to grow (albeit at a slower pace) even after the pandemic. EdTech is a very diverse industry with a wide variety of business models. However, many companies are looking to scale their products to the global market. Giants such as Coursera (COUR) have already successfully entered the global market and are mainly focused on short academic courses. There are also large local players in emerging markets, such as Skillbox, which benefit from the need for regional players offering modern vocational education that can give good jobs. Most of them are successfully implementing their strategy, and will definitely benefit from the growth of the EdTech industry in the coming years.

Since its IPO, Coursera’s stock price has fallen about 50%. If the fast-growing EdTech company seemed very overvalued then, the situation looks different now. The company continues to show decent revenue growth, and its valuation (based on the DCF model) shows decent potential. Regardless of the fact that Coursera is making a loss, it has a fairly strong balance sheet, and within a few years, it could reach a stable profit.

In this article, I break down Coursera’s business, key financial aspects, and an analysis of the EdTech industry. I also present Coursera’s DCF valuation model, which outlines its investment potential.

What is Coursera?

Coursera is one of the largest online educational platforms in the world. The company was founded in 2011 and it now has over 92 million registered learners, 711 enterprises, and over 16,000 degree students. The platform’s main product is online educational courses put together with universities, corporations, and educators.

The Coursera business consists of three segments:

  • Consumer – 60.5%. Coursera receives payment for educational courses from individual users and pays a portion of the profits to partners who create these courses. The segment’s gross margin is 68%.
  • Enterprise – 28.9%. Institutional consumers (corporations and educational institutions) work with Coursera based on a subscription model. Coursera pays partners and course creators for each student. The segment’s gross margin is 67%.
  • Degrees – 10.6%. This segment is represented by students enrolled in bachelor’s and master’s degree programs created jointly with universities, and they receive a diploma at the end of their studies. It is noteworthy that over the past year the share of this segment has grown because its gross margin is 100% (all expenses are borne by the university and paid by Coursera for the use of the platform).

The Coursera business is well-diversified and has a very high gross margin. Also, it is a global business. Coursera sells its services all over the world, but predominantly, in the U.S. and EMEA.

Financial review

Coursera is a fast-growing company. And as is typical of many such companies, it is unprofitable. However, it is not as bad as it may seem at first glance.

Coursera income statement

Coursera

Source: created by the author using data from Seeking Alpha

The company’s revenues are steadily growing at a good pace for this industry, and even more significantly, revenues are growing faster than costs of revenues. Operating expenses rose sharply in the second quarter of 2021 due to growth in SG&A and R&D expenses. This, too, can be seen as a positive signal, as the company is actively investing in the business. However, it is important that revenues continue to grow rapidly due to these investments.

Growth Rates Jun 2020 Sep 2020 Mar 2021 Jun 2021 Sep 2021 CAGR
Revenues 37.0% 12.2% 6.9% 15.5% 7.6% 15.4%
Cost of Revenues 40.8% 10.8% -0.5% 5.9% 2.4% 11.0%
Operating Expenses 20.2% 6.1% 22.1% 57.1% -7.0% 17.9%

Source: created by the author using data from Seeking Alpha

As mentioned above, Coursera has a very high gross margin, which continues to grow. The current figure is significantly higher than the industry average.

Losses are bad, but the value of the company determines the cash flow. Coursera is gradually reaching a positive net cash flow. A more detailed picture is painted by the company’s valuation using the DCF model.

For startups and growth stocks, indicators of financial health are extremely important. Here Coursera is the clear favorite. At the moment, the company still has huge cash reserves in its accounts after its IPO (according to Q3 2021, it had more than $816 million in accounts). At the same time, the company has very low debt, only $21.4 million. The D/E ratio is only 2.83%. Such a large liquidity cushion allows the company not to worry about losses, because even with inflation and a possible increase in net losses, this could be enough for several years.

EdTech will maintain decent growth after the pandemic

The pandemic was probably the strongest ever push for distance education services. However, shares of most educational platforms have been falling for the last 9 months, including Coursera. Some of them have shown slightly worse financial results compared to 2020, but the most important reason is investors’ expectations of a return to normal life and a return to the usual offline education.

“Back to school” is inevitable and probably on the horizon. However, this does not mean that online education will disappear from our lives. It could play out the opposite way: it will become a greater part of our lives, accompanying us not only during school or university but throughout our whole life.

When it comes to EdTech, many people forget that the main goal is not to replace education but to make it more effective and accessible through the use of technology.

EdTech is capable of maintaining growth even after pandemics and lockdowns. The year 2020 was a strong push for the industry, which resulted not only in the growth of users and revenues, but primarily in mass adoption. Further growth for EdTech services will be much easier since they already have a reputation and a base of users and partners.

The industry is projected to grow at a double-digit rate in the following years. Technavio expects a 17.85% CAGR in the following 4 years, mostly provided by North America (and particularly by large North American companies like Coursera, which provide services on the global market). Forecasts published by HolonIQ estimate a slightly lower CAGR for the years 2022-2025, 16.4%. However, I believe that EdTech can grow faster as it gains weight in the wider education industry.

Digital education is grossly underrated. Over 1.5 billion schoolchildren and students around the world have been forced to adjust to changing circumstances and switch to distance learning. This was only possible at the expense of the good base already in place, which was tried and tested. Education is roughly a $5+ trillion industry, and EdTech is just a small part of it. Given the need and the speed of development, EdTech could take a very large part of this industry. Compared to many other industries, the ratio of the market capitalization of educational companies to the capital base is quite low. For example, the education global market cap is around $300 billion and the education global market is around $5 trillion, while the healthcare global market cap is only around $5 trillion, and the healthcare global market is around $8 trillion.

The digital education industry is very active in attracting venture capital investment. As of 2021, EdTech has raised nearly $21 billion in venture capital investment. Even despite the decline in the value of companies on the stock exchange, venture capital investment for 2021 has only grown.

EdTech industry venture investments

HolonIQ

Like all fast-growing segments, the EdTech industry is characterized by active mergers and takeovers of companies. Often, large players buy small companies to develop the products within their ecosystem. But in EdTech, you can also see international mergers of local companies. For example, in November 2021, a merger was announced between Russian holding company Skillbox (the largest player in the local market) and Brazil’s Mentorama. Skillbox operates in the niche of professional retraining, teaching digital occupations. This lucrative niche is in strong demand, and is consequently growing fast in developing countries. For Skillbox, it is an opportunity to enter the global market, namely fast-growing Latin America. We should expect more active development of local players on the global market.

U.S. vs. emerging markets

There is plenty of EdTech all around the world. Some companies, including Coursera, are popular worldwide, while some are local players. Some of the strongest local players can be found in emerging markets. There are two obvious reasons for this: the large population and the need for quality and accessible education.

Over the past year, there have been many important developments in emerging markets regarding digital education. Probably the most significant thing was the ban on online private tutoring in China. Before this event, China was the second-largest (if not the largest) EdTech market. But most public companies lost more than 95% of their value because of this ban and other domestic political events. The victims were such well-known companies as New Oriental Education & Technology Group (EDU), TAL Education Group (TAL), and many others. At the moment, the prospects for the Chinese education industry are not obvious.

China has been replaced by another fast-growing market, India. It is now actively attracting venture capital investment. So far it is not represented by public companies on U.S. exchanges, but we can prepare for their appearance. Three new Indian unicorns emerged in 2021: Vedantu, upGrad, and Eruditus.

Another strong market is Latin America. The reasons for the rapid development of EdTech are the readily available and fast internet, as well as the low-quality education, and the growing need for it. So far, it is difficult to identify very large companies in Latin America, but key players are already emerging.

Russia is another developing economy where we can observe positive changes in the EdTech industry. The Russian market has grown twice as fast as the global market in recent years (the source in Russian can be found here). Russian companies are focused on building global ecosystems. Yandex (YNDX) creates educational services independently from scratch, while VK (OTC:MLRUY) (OTC:MLRYY) is actively acquiring stakes in major EdTech startups, in particular Skillbox.

Skillbox is Russia’s largest EdTech holding company, which includes several online schools, including those in foreign markets. The company shows a high rate of profit growth (their year-on-year revenue doubled in the third quarter of 2021). It boasts the highest revenues in the industry. The secret of Skillbox’s success on the Russian market is its hybrid model: the company tries to attract the maximum number of users while not slashing prices. Another aspect is that Skillbox creates content by itself, thereby actively participating in building the final product’s value. Thus, it seeks to maximize revenue through average prices, but large-scale training courses. The management of Skillbox (together with owner VK) is actively engaged in the establishment of operational activities and cost optimization (the source in Russian can be found here). This suggests a possible preparation for an IPO, particularly given the context of the growing popularity of initial public offerings in Russia.

Nevertheless, the main driver of the industry at the moment remains the developed markets, and in particular, the United States. Most startups successfully become unicorns in these markets, and, accordingly, they collect much of the capital inflow. At the moment, EdTech companies coming from emerging markets are at an early stage of growth, so they are able to show very high growth rates. Their peers from developed markets are already showing relatively slower growth, but larger in monetary terms. Therefore, at the moment, according to analysts, the companies from developed markets will continue to make the largest contribution to the growth of global EdTech in the coming years. Consequently, Coursera will be one of the leading companies driving the growth of this industry.

DCF Valuation

The DCF model can most accurately reflect the potential and fair valuation of fast-growing companies, especially those with no profits. The following model is quite conservative in terms of projected growth.

The following illustration shows the calculation of free cash flow to the firm and the key inputs to the model. The calculation was based on the forecasts generated by Alpha Spread. They are based on historical data and analysts’ forecasts. Only Cost of Equity was used to calculate the discount rate, since the company has no debt.

DCF valuation of Coursera

Author’s estimates

The result of the evaluation is shown in the following table. At the moment, Coursera stock has a 29% upside potential. DCF model valuation results are very close to the lower end of the consensus forecast of Wall Street. The company has a Strong Buy recommendation, which I agree with.

Indicator Millions of $
DCF Value 2842
Cash & ST Investments 816
Shares Outstanding, mn 137.84
DCF Value per Share, $ 26.54
Current Price, $ (6 Feb 2022) 20.53
Upside Potential 29.3%

Source: created by the author

However, it is worth considering a likely increase in the risk-free rate, followed by a decrease in this valuation. The sensitivity analysis shows how much the company’s valuation can change depending on the discount rate (in 0.5% increments) and the growth rate in the post-forecast period (0.5% increments). The current price justifies the situation if the rate was increased by 200 basis points.

DCF valuation of Coursera

Author’s estimates

The Bottom Line

In the current market, it is difficult to find fast-growing companies that belong to young industries but are not overvalued. Coursera is one such company.

EdTech is a very young and undervalued industry that is capable of sustained double-digit growth. The industry will continue to grow even after students go back offline because it’s more than basic education. It is a truly global market, with both local and international players. It is also worth paying attention to the emergence of new companies that may soon become unicorns and go public. As one of the largest companies operating around the world, Coursera can safely be called the locomotive of this industry.

Coursera stock has fallen very much in value over the past few months and is trading at less than half its IPO price. Right now, Coursera looks pretty cheap, which makes the company a potentially interesting investment. My valuation model shows a 26% upside potential for the stock price to $26.5, which is pretty good for the current state of the market. In my opinion, Coursera is a strong company in a very undervalued industry.



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