Zolak/iStock via Getty Images
Zolak/iStock via Getty Images
Udemy (NASDAQ:UDMY) has gone public in an offering which has received a modest welcome as investors fear that this learning platform is perhaps not as unique as competing platforms. Slower growth and margin concerns (or better-said losses) mean that I am not necessarily finding the relatively lower sales multiple appealing.
I think that Udemy here largely trades around fair value, as at these levels I fail to see great appeal here amidst reasonable relative sales multiples.
Udemy aims to create new possibilities for people and organizations everywhere by connecting them to knowledge and skills which they require in a continued changing world.
The company was founded in 2010 and four years later it breached the 1 million learners milestone. Ever since, the company has grown rapidly, and by 2017, it had 10 million learners, a number which has grown to 44 million by the time of the public offering late in October.
The company offers a marketplace platform with thousands of up-to-date courses in a dozen languages. The company operates under the belief that traditional education methods are becoming outdated. The rapid change in the effective qualities needed in today’s world require lifelong learning and continued skill acquisition.
By now the platform includes 44 million learners which can access 183,000 courses in 75 languages. Moreover, the platform is not just one-sided, as there is iterative Q&A as well, including quizzes, exercises, among others. The idea is that the platform offers a flywheel of both course applicants and the marketplace, as Udemy focuses on customization to drive appeal and good recommendations.
28 million of the 44 million users follow nearly 18,000 of the free courses offered on the platform. These customers mostly comprise consumers, but furthermore involves corporate users who provide this to their employees as a form of corporate training. The business model relies heavily on paid instructors which provide these courses. In total, these instructors were paid $161 million in 2020 or close to $3,000 on average for nearly 55 thousand instructors.
Management and underwriters of Udemy aimed to sell 14.5 million shares in a preliminary price range between $27 and $29 per share, as pricing has been set at the high end of the range. This results in gross proceeds of $420 million coming from the offering.
With 137.4 million shares outstanding following the public offering, the company has been awarded a $4.0 billion equity valuation at the offer price. This includes a net cash position of around $350 million, for a $3.65 billion enterprise valuation.
The company has seen rapid growth. In the year 2019, Udemy generated $276 million in revenues on which an operating loss of $68 million has been reported. Revenues were up 55% in 2020 to nearly $430 million, as operating losses increased slightly to $73 million, still resulting in some relative operating leverage of course.
The company has seen continued commercial traction in the first half of 2021, albeit that revenue growth slowed down to 24%, as revenues just surpassed the $250 million mark, now running at a run rate of just over half a billion. The growth slowdown does not come unexpected as the second quarter of 2020 has been very strong, driven by the pandemic, of course, resulting in very tough comparables. Operating losses have narrowed significantly, as an operating loss of $50 million narrowed to $27 million for the six-month period.
The company has only reported the preliminary third quarter results, with revenues in the first nine months of the year seen at around $379 million. This suggests that third quarter sales come in close to $129 million, up less than 10% from the same quarter last year. With operating losses for the nine-month period seen around $37 million, that reveals that third quarter operating losses are seen around $10 million.
At the offer price and valuation, the company is awarded a 7 times sales multiple as the company continues to post moderating losses. The pace of growth is hard to figure out after spectacular growth in 2020 has been followed by slower growth this year, and certainly in the most recent quarter.
At this point in time, shares have fallen back to $26 and change, which has reduced the valuation by more than $300 million, resulting in the sales multiples compressing to 6.4 times based on the annualized third quarter sales numbers.
Other than the valuation and losses, there are other risks to the business and the shares as well. This includes the business model, in which the company relies heavily on independent contractors and contributors (resulting in liability and IP concerns as well). Difficult comparables and fierce competition are other reasons to be concerned.
Competition, among others, comes from LinkedIn Learning, Pluralsight, and Skillsoft, as well as from other platforms like Coursera. Pluralsight was acquired late in 2020 by Vista Equity Partners, in a deal which closed earlier this year. The $3.5 billion deal valued the company at nearly 9 times sales, with revenues growing at 24% in 2020.
Coursera (COUR) currently supports a $4.3 billion enterprise valuation with revenues up just over 30% in the most recent quarter. Revenues are trending at $440 million a year. This too results in a roughly 9-10 times sales multiple.
Based on these comparative valuation metrics, Udemy trades at a lower valuation, but it is still posting losses and topline sales growth (notably in the third quarter) as this looks quite underwhelming.
Hence, I find myself in doubt a bit. Contrary to professional education plays, Udemy relies heavily on independent contributors which makes it hard to control the “input”, both in terms of quantity and quality. This observation, the slower pace of growth and losses make me a bit cautious here, as the low multiple does not automatically translate into appeal. Thus, I am not seeing any convincing reason to jump aboard at this moment, as appeal has to come from growth acceleration and continued operating leverage.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within 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.
