Stock Fundamentals

Why you should accumulate this Nasdaq-listed new age company

Hari Vishwanath | Updated on: Jan 16, 2022
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The company is levered for structural shifts happening in the field of education

The more markets keep moving up relentlessly, the more difficult it is to find good opportunities for the long term, as many stocks have already priced in long-term growth prospects. Relentless upward movements in markets like what has played out since Covid-19 lows, come with risks of stocks getting overvalued too soon and prone to correction and, in some cases, severe correction at some time in future. Hence stock selection during such times has to be done with caution. One has to factor upside opportunity from long-term prospects, while at the same time also assess how much downside protection the stock has in case any of the risks that can rattle markets play out.

Typically, companies with strong balance sheets tend to offer better downside protection, as long as they are not overvalued relative to their long-term business prospects. One company that fits this criteria is Nasdaq-listed and popular online education company Coursera (Ticker: COUR). Long-term investors can consider accumulating the stock.

Coursera is a typical new age company, but not trading at lofty valuations. While the company is still in the early stages of monetising its business prospects and currently unprofitable, from a new age company perspective, it trades at reasonable 4.7 times EV/Revenue (CY22). . EBITDA margins, while negative, are only modestly so. This is relatively better than the trend seen in many other new age companies today.

Most importantly, net cash in its balance sheet currently at 25 per cent of market cap is likely to provide good downside support in case of broader global market corrections. The company’s cash burn is low – free cash flow is negative, but expected to be very low at around 1 per cent of current market cap. Hence business can largely be sustained from annual cash flows without much requirement to dip into its existing cash balance. Only risk would be utilisation of the cash for a large acquisition. However, the management’s past track record indicates this is unlikely.

While the stock thus comes with levers that are likely to offer downside protection on one hand, the significant upside if the company successfully monetises, executes and expands its business over the next few years makes investing in it a risk worth taking. The stock, which was priced in its IPO at $33 per share in March 2021, is now available at a good 32 per cent discount.

Green prospects

Founded in 2011 by two Stanford University professors Daphne Koller and Andrew NG, Coursera is now one of the largest online learning destinations in the world, connecting an ecosystem of learners, educators, and institutions with a platform of high-quality content and credentials, data, and technology. Its online learning platform now serves around 92 million (and expanding) registered users across the world.

The company currently has partnerships (expanding) with over 250 University and industry partners, giving access to thousands of offerings ranging from open courses to full diploma-bearing courses. Through these partnerships, Coursera’s registered users can learn in their homes, through their employers, through their colleges and universities and through government sponsored programs.

Coursera is right at the cusp of transformation happening in the way we consume knowledge. Democratization (of information, learning) as a theme is a key influencing factor and a strong trend in today’s world driven by technological advancement, and cultural and attitude changes (millennials). The way we want to learn at the convenience of sitting at home, or reskilling ourselves, while also working at the same time are being more easily enabled with online learning. Widening skill gaps as technological advances alter the way businesses function is also driving the need for continuous reskilling. Not just demand from employees, but even companies are under pressure to constantly reskill their workforce to remain relevant in fast transforming world.

Given the above factors, Coursera as one of the pioneers in this space, is well primed to tap this opportunity. According to data in company filings, the global education market is large and growing, currently at a size of $2.2 trillion. The global online degree market which was at around $36 billion in 2019, is expected to grow at 14 per cent CAGR to $74 billion by 2025. Around 1.3 billion people are projected to reach working age in the next 10 years driving the need for global education. As of now access to higher education is still a challenge for vast majority, with only 39 per cent of the people entering global work force having had access to college level education. The runway of opportunity for Coursera thus appears long.

Business Model

Coursera monetizes its offerings via a freemium business model. The access to most of its courses are free. Registered users who become paying customers, can gain access to graded assignments and assessments and receive certificate of completion after finishing a course. Learners can thus pay for additional entitlements like the ones mentioned above on a one time basis or on a subscription basis. Besides the company also makes money from two other business segments. One being enterprise segment - sale of subscriptions to institutional customers which consists of businesses, universities and governments. This offering is useful to customers to reskill and provide enhanced learning opportunities to their respective cohorts. The third segment is Degrees, under which the company partners with universities worldwide to develop and deliver fully online bachelor’s and master’s degrees to global learner audience. In this case each university pays Coursera a percentage fee based on the online student tuition in a given period. The company’s large pool of registered users serves as an important source of potential customers for its enterprise and degree offerings. As of Q3 2021, consumer segment accounted for 60 per cent of revenue, enterprise 29 per cent, and degrees 11 per cent.

Recent performance

Coursera got a boost from the pandemic as it accelerated the shift to online learning and as well as digitisation which triggered need for reskilling. Its revenue grew 60 per cent in CY20 to $293.5 million and it is expected to close CY21 with revenue of around $411 – growth of 40 per cent. It reported EBITDA margins of minus 17 per cent in CY20, which is expected to improve to minus 8 per cent in CY21 (Q4 CY21 numbers yet to be reported). Consensus expectations are for revenue growth of 25 per cent and EBITDA margins of -6.8 per cent in CY22. The company is in a high growth phase and focused on investing to tap opportunities, Besides it has a strong balance sheet. Hence its modestly negative EBITDA margins are not a concern for now.

Published on January 15, 2022

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