anyaberkut/iStock via Getty Images
anyaberkut/iStock via Getty Images
Coursera (NYSE:COUR) is a long-term secular winner. The company benefits from the growing demand for (digital) education. It’s undergoing a favorable, yet overlooked, transition from B2C to B2B. The transition should improve both its margin profile and the strength of the company as a whole. Coursera’s valuation is undemanding. While its multiple may come under pressure over the coming months with rising rates, it should be able to protect itself by delivering better than expected results enabled by the strength in the labor market. Coursera is a top pick for me in the growth space with a decade-long investment horizon.
Coursera is primarily differentiated from its edtech peers by its wide-ranging verticals. The company is serving consumers, enterprises, and education institutions. This diversification protects Coursera from a change in spending patterns or a competitor in any one vertical as well as offering it the largest TAM in edtech and the most number of avenues for growth.
The Consumer segment, historically the backbone of the operation, is giving way to the Enterprise and Degrees segments. Most of us know and love Coursera for its online lessons and courses that we can take for free or pay to earn degrees. There is so much more to the company, however. Coursera launched a B2B segment in its Enterprise division looking to provide services to companies as well as governments and universities. This division is extremely important in my opinion as it should pave the way for the recognition of Coursera’s online education operations in the future. The majority of people pay for education for professional recognition. Employers using Coursera’s services is proof of their approval of the company’s services. The more institutions utilize Coursera’s services, the more Coursera should gain recognition.
Perhaps even more important than the rest of the Enterprise segment is Coursera Campus. Coursera Campus enables universities to provide online education to their current students. Campus’ uses are wide-ranging from the utilization of Coursera’s digital infrastructure to providing lessons in areas where universities lack resources. Coursera Campus is extremely important as the stamp of approval from recognized institutions is the ultimate seal in converting both consumer and enterprise traffic.
The Enterprise and Consumer segments should operate as the perfect edtech flywheel. Enterprise should increase respect and recognition of Coursera to increase the perceived value for consumers and the Consumer segment should bring low-cost traffic.
The third wheel in this system is the company’s Degrees segment. Coursera Degrees enables consumers to earn actual degrees from recognized universities. The Degrees segment fits perfectly into Coursera as it plays into the theme of university stamp of approval as well as additional revenues.
Overall, Coursera has a very attractive business model. Its B2B segments offer it not just a more visible and resilient earnings profile but also benefit it in making the total company worth more than the sum of its individual parts.
The Consumer segment may be dominating revenues today but its share is receding. Coursera derives >60% of its revenues from the Consumer segment but the segment grew just 16% YoY in 3Q versus a 75% growth in the Enterprise and a 59% growth in the Degrees segment. Enterprise and Degrees segments should continue to represent more and more of total revenues given their rate of growth.
This is a favorable shift as the change should spark a change in the company’s margin profile. The Enterprise and Degrees segments require fewer resources from Coursera and have structurally much higher margins. These two segments combined recorded gross margins of 77% over the past twelve months versus 62% for the Consumer segment. Coursera should approach the higher number as these newer segments grow to become a larger part of the company.
Both overall and relative margins should improve with scale as well. Coursera is primarily a software business and like any software business, its margins should improve as it grows as its mostly fixed infrastructure and G&A costs decrease as a percentage of revenues. But it doesn’t end there. The growing segments of Coursera should be able to scale better than its Consumer segment. Enterprise and Degrees segments involve much fewer incremental costs for the company and likely have much lower acquisition costs. Moreover, as noted above, the growth of these segments should increase the value of the Consumer segment and increase Coursera’s B2C pricing power and conversion rates. The growth of Coursera isn’t just important because of increasing revenues and earnings but also because of the increasing quality of its earnings as well.
The runway for growth for Coursera is truly huge. The company cites a whopping $2T TAM for its operations and it’s easy to see how. All three of its segments are to see dramatic adoption over the coming decade as the company remains a key beneficiary of the growing global demand for education particularly digital education.
The Consumer segment should see steady adoption as recognition for Coursera’s services increases. More and more people will be looking to develop certain skills or sharpen existing ones.
The Enterprise segment has perhaps the biggest runway of all three. Educating employees is a hassle for corporations and governments and often requires the use of external resources. Outsourcing or growing these capabilities dependably and affordably should be very attractive. The spending on education for corporates is massive from onboarding courses to annual development ones, to specialized training for certain capabilities, the list is long. The market for the Enterprise segment is massive and should grow rapidly.
While online Degrees won’t replace in-person university degrees anytime soon due to the social component of the latter, there is a big need for the former and it should grow in acceptance nevertheless. University degrees are very expensive. They’re difficult to complete for students that have to work and can’t commute. Digital degrees enable affordable and location-agnostic education and not all jobs require networking during university. I expect online degrees to take a growing share of the education market and the Degrees segment of Coursera to continue its rapid growth for years to come.
We have in Coursera, an innovative company with a massive TAM, rapid growth enabled by underlying secular trends in all its segments, and a favorable structural change in its margin profile. All of this is offered at just 4x next twelve months’ revenues at $2.8bn market capitalization. I’m a buyer of Coursera today with a decade-long time horizon as I expect it to grow far beyond its current valuation in a matter of years.
I say a decade-long time horizon as I believe that the current rising-rate environment, which I expect to continue, should be a headwind for the growth complex in general and for Coursera’s valuation. The Company is at an early point in its growth cycle and is valued on potential future cash flows which makes it a long-duration asset. Long-duration assets are harmed by rising rates due to increasing WACC. This is the primary reason for the company’s underperformance since its IPO.
I see this as a transitory problem. Rising rates are a serious issue for companies that have no visible path to profitability or have cash flows that are very far out in the future. Coursera isn’t one of these companies. Current consensus (caveat here is that there is only one estimate) calls for just 47x three-year forward earnings. I’d call the estimate conservative and even with this conservative estimate, this isn’t that expensive. The current risk-off sentiment may continue to harm the stock price over the near term but the stock should be able to deliver alpha given time.
Furthermore, the near-term results should come in strong driven by current labor shortages. Corporations are more likely to invest in and develop their current employees when they struggle to find workers meeting their capability requirements. Potential employees are also more likely to invest in developing new skills to land better jobs. Thus, the current environment has a mixed effect on Coursera with a tight job market benefiting earnings but rising discount rates putting a lower multiple on these earnings.
I see Coursera as a secular long-term winner with near-term drivers as well. I see the valuation as undemanding given the company’s prospects and see the stock as among the best among growth peers.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in COUR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
