Returns as of 03/03/2022
Returns as of 03/03/2022
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In this episode of Industry Focus: Consumer Goods, join Motley Fool analyst Asit Sharma and host Emily Flippen as they study up on the evolution of higher education and tackle Coursera‘s ( COUR -0.57% ) business model, competition, management, and whether it is or is not an investment-worthy stock for them.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on April 6, 2021.
Emily Flippen: Welcome to Industry Focus. Today is Tuesday, April 6th and I’m the host of this consumer goods episode, Emily Flippen. Today, I am joined by Motley Fool analyst Asit Sharma, and we’re going to be talking about a recent IPO and the higher education tech space, if you will, Coursera. Asit, thanks for joining.
Asit Sharma: Emily, I appreciate you having me on. I feel like something of a scholar today because we’re talking about online education taking you back. As I understand, it’s taking you back. [laughs]
Flippen: Yeah, let’s say, if I’m honest, this isn’t one that I’m particularly excited to cover. I don’t know if it’s my job or if it’s the way I talk. I think some people presume that I was very successful in school and while I was not a complete failure because it got me to the point where I am today. I would not say it was always a positive experience for me, in fact I still as an adult who has been out of school for over half a decade now have a recurring nightmare that I forget about a class for an entire semester, or forget about a test and I show up in the classroom and the teacher is like, “Are you ready? This is the final exam, it’s 50% of your grade. Where have you been all semester?” That recurring dream, no joke, probably weeks for my sleep on a monthly basis. [laughs] Covering this company has brought back some of those feelings.
Sharma: Emily, I think we all have dreams like that, maybe not in the classroom setting. That one has fallen a little bit out of my rotation, the older I grow, but every once in a while I will wake up and I’m standing there, maybe I’ve to recite a speech or answer difficult question, I’m flabbergasted, I’m starting to sweat and I’m thinking, why even do this? I could have done so many other things in life and trying to get this degree that I’m going for. Like you, I wake up at some point, I’m through with school, it’s all over. [laughs] That’s a good feeling, it’s almost worth the bad dream. Just to get to that bit of relief, when you’re out of school, schooling happens.
Flippen: Exactly. [laughs] Although I’m sure there are many millions of Coursera users that would agree with you that despite the challenges that school may have posed for many of us, it’s still something that’s worthwhile and definitely worth pursuing, which is really what Coursera has created as the bread and butter of this platform, something that used to be known as MOOCs or this massively open online courses and education company that has now started reinventing its business by partnering with businesses and institutions. We’ll get to it all and I will let you explain it because you know it way better than myself. But for investors for whom this may be an entirely new business, Coursera is this academic platform that filed their S-1. So their intent to go public back at the beginning of March. They actually went public last week on March 31st. They trade under the ticker symbol COUR, and they have a market cap of just over $7 billion. I’m not sure if that sounds large or small to you, maybe it depends on how familiar our listeners are with the business. But that is up over 40% in the week since their IPO. So it has definitely been a successful IPO just based on price appreciation.
Sharma: Yeah. But if it’s easiest to judge a stock by price appreciation alone after the IPO, investing would be so easy, we have to look at the business, which is what we’re here to do. So I am going to jump into the business model and then we get to talk a little bit about the founding of this business and then the nuts and bolts of how they set up their catalog and I’m curious to hear your thoughts on that. Without further ado, interesting, you mentioned massively open online courses or MOOCs. I associate those in my mind with really good institutions like MIT and Stanford, because when MOOCs first opened up, they were at the forefront of this. They just opened up their university catalog on a limited basis for thousands of people and Coursera, as you mentioned, came out of this. It was founded in 2012 by two Stanford professors Andrew Ng and Daphne Koller. Both of these were genius professors at Stanford working on cutting edge stuff that now it’s just wending its way into the everyday fabric of our lives, artificial intelligence and machine learning. We’re seeing it everywhere. But you think back to 2011, this was still relatively new stuff. So both Ng and Koller were offering MOOCs in 2011 in machine learning and artificial and Ng’s course had 104,000 registered users all across the globe. I just found that so interesting. About 13,000 of those students received a certificate of completion, they finished the course and these two professors, who were friends, decided they were on to something. [laughs] So they built this platform, they got some funding. But different from other platforms that were beginning at that time, which were more focused on skills building, they decided to go ahead and partner with any institutions they could that were higher education with good reputations.
Ehey were able to sign agreements with University of Michigan, with Princeton, UPenn, University of Pennsylvania, and of course, their home university of Stanford, which they left to found this company. If you fast-forward today, Coursera partners with about 200 institutions, 150 of these are universities and 50 are industry partners. I’m just going to read this from their S-1. “Coursera offers a broad range of learning offerings from a two hour guided project for $9.99 on how to build a website to Master of Public Health degree from the University of Michigan for approximately $45,000.” Well, they don’t say bucks. I’m saying “bucks,” but still, that’s big bucks. [laughs] This is so interesting. They have a really wide, wide range of offerings. You could do something very very simple or you can go in for a whole degree.
Let me just give a few statistics about this course catalog, and then I’ll pause here and we can discuss some. In the Coursera catalog, they have about 1,000 of what they call guided projects. These are projects you can complete in under two hours, again, for about 10 bucks a pop. You can also take one out of 4,600 courses, which last four to six weeks and many of these are free. There’s a number of these courses that you can take without paying a dime and this runs to about $99 for the ones that are paid courses. Then they have something called specializations, which is basically that skill building element that many other platforms have been offering. They’ve got about 500 specializations, these last three or six months. They run from anywhere from $39-$99 a month. Then they have certificate programs, they’re about 40 of these. These take a little bit longer, three to 12 months. Same price range, $39-$99 a month. So you’re going to pay anywhere from $2,000-$6,000 to get a certification. Think professional certifications that you can use, say in data analytics. All types of industries. You could beef up that resume. Finally, they’ve got 25 degree programs, these are 2+ year programs that will run you anywhere from $9,000-$45,000. Just curious, Emily, I think both of us had loosely followed this company just hearing about it over the years, I’d never delved into any of the statistics until they published the S-1. What were your thoughts when you looked at the catalogs, what it’s evolved into?
Flippen: I love that question and I’m going to do my best to refrain some of my skepticism until later in the show because —
Sharma: Come on, Emily, bring it. [laughs]
Flippen: [laughs] I do think my opinion about the business has been colored by my experience with 2U ( TWOU -4.27% ), which is not an identical business, but you could say it’s a competitor to Coursera. We could talk about that later in the show. I will give credit where credit is due here. One of the things that I really like about the Coursera catalog and business model is that it doesn’t really quite have a one for one competitor in the market because they have essentially these three different avenues of business growth, they have the consumer offering that you just mentioned. So the average person coming in on this premium model, they’ll come in, they’ll take a course. Just something really simple that’s free. Then they think to themselves, that was a cool experience. I could further my career, further my education with this and slowly work up the tiers paying for that $10 a course and then getting into the $100s and then eventually maybe moving onto some Masters program. I like that kind of pathway that Coursera has carved out. I think it’s at least the only business that I’m familiar with that has that same consumer-facing model, while also still partnering with institutions and universities on the back end. So I like the fact that they’re getting revenue from consumers.
I also like the fact that they’re getting revenue from businesses. Just employers that are looking to get subscriptions for their employee base so they can utilize those resources to improve their workers. Then also universities which are obviously trying to make this digital transition even before COVID happens. All of this I like, and I can understand why it can make a really compelling value proposition. I do think that Coursera does have something unique in the funnel that they’ve created.
Sharma: I’m going to withhold just in the interest, building suspense by opinion where I landed on Coursera. [laughs]
Flippen: I love it.
Sharma: I like the upfront skepticism. I’m a big fan of Chegg. This is an online learning company that specializes in book rentals, which is now a smaller part of the business. Online tutoring knowledge base, providing answers for students to learn. They’re increasingly using artificial intelligence to build students’ skills in grammar and math. They have a really focused model. They are not trying to do necessarily a big front end and back end and be all things to all commerce, which Coursera is. They’ve carved out some market share in doing that. I will try to keep my tone neutral in case anyone was able to ascertain any of [laughs] the company’s investment, up until then. In those three avenues that you mentioned, let’s look at just a few statistics. They’ve got 77 million registered, they call them learners. So if we say learners, we really mean users, I think that’s what they mean too. Seventy-seven million registered learners, they’ve got about 2,000 businesses that are paying for their Coursera for business offering. During the pandemic last year, 4,000 colleges and universities launched free online programs via something called Coursera for campus. There is also part of this premium model that allows universities to put some of their own content up. I think this was very helpful, and built a lot of goodwill with universities that aren’t necessarily partnering with them in any other fashion last year.
Also, at the end of last year, they had about 300 global governments and governmental agencies that were using the Coursera for government offering. This is to train employees and to improve employee skills, they called this up-skill. I think that’s the lingo of the educational industry, but basically it’s training. These statistics are impressive. I think it gives us a flavor or taste of the breadth of where they’re going and also helps delineate, as Emily explained for us, these three big avenues that they’ve got. All of which we’ll talk about this in a bit, are growing very quickly. But let’s talk about one little quirk of the company, which I liked in a way. [laughs] So this is a certified B Corp and we’ve come across B Corps before. Famously, Etsy was a B Corp before it changed its status. But recently, Emily, we have talked about thredUP ( TDUP -1.25% ) which just had its IPO. We covered their IPO filing a few weeks ago. That’s an example of a company that has achieved B Corps status. B Corp status is given by a third-party and it simply means that a company has met certain standards in sustainability and environmental performance. To receive this designation doesn’t have a lot of weight otherwise in the real-world, although it can be influential if you’ve got the status for your brand and it can influence the way a board acts.
Now tacking onto the certified B Corp status, Coursera is also a public benefit corporation organized in the State of Delaware. What’s that? This is a more recent type of corporation and its actually one I would say ESG goals behind it: environmental, societal governance goals. If you are a public benefit corporation called a PBC, you’re required to include in your charter a specific public benefit as part of the statement of purpose of your company. Most of the time in boilerplate legal language, companies just say, “Hey, we’re organizing to do business for any lawful purpose.” That’s the [laughs] key phrase. But when you choose this PBC path, your board is forced to consider public benefit alongside the goal of maximizing shareholder value. The point to whatever specific benefit you stated in your charter. This is Coursera’s specific public benefit to provide global access to flexible and affordable, high-quality education that supports personal development, career advancement, and economic opportunity. Now, I personally find this pretty laudable, but the company does site in its risks section that this PBC status is a business risk. Because key strategic decisions aren’t always going to be made with a solely economic purpose behind them.
Flippen: I agree with your take. I think nine times out of 10, if I could totally make up a statistic, being a PBC is probably a net good thing, not just for shareholders, but for the world at large. I love expanding the mandate of companies to be not just looking at shareholder value, but to be looking at all stakeholders in a business. Because I think that those two things long term, inherently go hand-in-hand. We can debate about it all day, I won’t force anybody to listen to me, study’s really aren’t there yet to back up opinions on either side of defense. Any opinion you have, is probably just influenced by personal experience, at least it is in my case. However, in this case, I do think there is a tangible business risk with Coursera being a PBC. They call it out themselves, but because of the way that the business is set up, I worry a little bit about their ability to meet that very lofty mandate. Because while it’s easy to say that we have these goals, to pursue them is another thing entirely. To pursue them aggressively, especially on a global level is a massive undertaking, that I worry, sets their mission almost too large. This is something that I was planning on mentioning regarding some of their metrics, but I will go ahead and mention it now. In particular, as it applies they’re demographic, the audiences that the business seeks to serve.
The reason why I think this could be a real business risk for them is studies have shown that online educators, especially once aimed at helping developing countries, have historically actually moved toward developed countries. It’s for people who have most reliable access to the Internet, most reliable access to information. So they have this big broad mission to provide education and access to people who wouldn’t otherwise have it. But most of these businesses up to this point, have failed at doing that. Despite the fact that over around half of their revenues come from outside of the United States there’s still centralized and developed countries. I don’t know how they could say we’re a public benefit corporation in their S-1, but not provide any demographic information about the users of their platform because I didn’t see any true information about who were the main users. They provided some anecdotal cases of people who would be great examples of this global affordable access to education. But in reality, studies show that they don’t quite get there. I’ll be watching that. I wish they had backed up this big, broad mission with some tangible fundamental metrics to say here’s how we’re executing on. Here’s where our customers mainly come from. Here’s how we’ve improved their access to education. But they just didn’t give us that.
Sharma: Yes it reminds me of another S-1 that we looked at another IPO which came to market. Help me remember the name, Emily, but it’s Rover. The company which you can use their app to hire someone who will sit your pets or do other tasks. Great S-1 and overall, a very impressive presentation, but they left out some key demographic information which for me I was trying to puzzle through, made a few things difficult. I had to make some assumptions and leaps here and I think it is astute to put your finger on this because if we had some of those global demographics, we might be able to see more tangibly where risk areas will occur and this comes down to capital allocation decisions down the road. If we’re going to have this fiduciary responsibility to our shareholders, that means one thing. But if we got a legal obligation to also provide for this public benefit, that’s quite another. What happens when the two clash, when we as a company, speaking in the first-person for Coursera, really the third person [laughs] for Coursera. When we’ve got to now go into, let’s say, some countries in Africa which aren’t as developed as maybe Kenya or Nigeria, the big GDP countries in Africa.
We’re going to sacrifice some margin points because it’s for public benefit. How does that square away with our shareholders who they’ve had a nice ride since we went public and they’re expecting us to keep pace with, let’s say, Udemy, and I’m now projecting to the future because Udemy is a competitive risk privately held, but let’s say that they are public in the future. You can start churning through these questions of how the tussle or the conflict between the public benefit and the shareholder benefit, how that all plays out and I think it’s fascinating, but we’ll move on to metrics and maybe we will return to this theme a little bit later. Emily, it feels like we’re always grading these prospectuses as we go along and do more and more of these [laughs] IPOs, like the metric section I saw it give a BB plus too. They had some useful metrics maybe not as drill down detailed as I would’ve liked to have seen. But I’m going to talk through a couple here and then maybe we can trade off on some of these. But they do track a really important big picture metric which is total registered learners. Mentioned earlier that they have about 77 million of these, that number is about double from what it was in 2017 when they had 30 million of these users. Last year’s growth in registered learners was really impressive, 65% growth year-over-year, although you have to take into account that it was a COVID inflected year. So there were tons of people at home suddenly looking for online education, so it’s obvious why that number would have been particularly strong last year.
As you mentioned, Emily, they’ve got this premium model which moves learners through free offerings and into paid offerings. That’s one big part of their strategy to grow those registered users and also they find that the learners as they become customers are good sources for some of the other revenue streams that they’ve got. They have some lead-generation that derives from learners who start with the free model and now are recommending it in companies that they work in, so a nice little momentum that they build through their model. They also track the number of degree students, sounds just like I said, not number of degree students but number of degrees students. This is also rapidly expanding and also got a boost last year from COVID. What I found interesting, Emily, is that while you would have expected a big boost in the first quarter of last year, which they got. Their total degree seeking students jumped about 160% versus the first quarter of the prior year to 7,200. What was interesting is that, in the following quarters, the second, third, and fourth-quarter Coursera averaged about 90% year-over-year growth in that metric ending this year with almost 12,000 students enrolled in degree programs. It seems like they may be able to get a little bit more of a longer term tailwind out of some momentum coming out of COVID. I was interested in that because degree students are a high-gross profit business for the company, this is where a lot of bread and butter revenue can come from and bread and butter profits. This is a good thing, I think, for them if they can hold on to some of these users.
Flippen: It’s funny that you mentioned that, I think out of all the businesses, we look at their S-1s. I’m not going to dock them too many points on metrics. I always want to know more information than companies are willing to give up but I need to come to accept that. Despite the fact that I feel like they didn’t give a ton of customer acquisition metrics, there are two metrics that I feel like are missing here, get at that degrees students idea which is that gross profit is increasingly being driven as people moving up the value chain in terms of their education so getting toward the higher-value degrees. There was a metric that I was hoping to see associated with that, that we didn’t quite get, in particular, completion rates. I was surprised they didn’t provide any more insight into what completion rates look like on their platform. They provided some with their university partnerships that were pretty decent. But actually on the Coursera site itself, there was very little information and that’s again, pretty critical going back to the PBC thing, because again going back to the studies that show that a lot of people from underdeveloped areas that access these sites aren’t able to complete them. You’re not delivering on your mission if people come into your courses but don’t end up completing them.
One of the metrics that 2U provides that I feel like would’ve been really valuable to see here for Coursera is something called full course equivalent enrollments and that is a unique thing to 2U, but there was really no one-for-one equivalent that I saw with Coursera. Essentially, it’s getting a sense of a number of enrollments that are happening on a per user basis and the amount of money that they are generating from those enrollments and they track this overtime. For 2U it’s been critical because the average core slowed has actually increased, but the cost per course has decreased which has deteriorated their financial position. If we could get an insight into how they would’ve calculated the average courses per user and how that’s tracked over time, I would’ve liked to see those two things.
Sharma: It’s interesting they provide some metrics for their enterprise business which help you gauge how they’re doing in terms of the stickiness of customers, how much the spend is growing. But there is no equivalent thing on the consumer side. Now, in the absence of that information, we’re left to guess, maybe they’ve got a lot of churn, if you will, in those courses that students just aren’t completing them, and they drop out after a third or a half. It could be that they mirror what the experience was of MOOCS when they first started. Remember, at the top of the show, we’re talking about 100,000 students who enrolled, which is a big number, and I put only in air quotes, only 13,000 completed the course. Maybe management felt that this might turn off investors if we saw the detail of just how hard it is to get a cohort of learners to move through and complete a degree together online. We see this in universities, of course, it’s really hard to get graduation rates into the upper 80% and 90%. It’s only a smaller percentage of really great institutions, be they public or private, ever hit those numbers. Lots of universities and colleges across the U.S. have graduation rates that are in the 70%’s. Maybe it’s just part of the game, but I would have loved to see that as well.
Speaking of those paid enterprise customers, this is something that I think has potential for Coursera, at least they’ve given us a little bit to chew on here. They define an enterprise customer as a customer with a contract that identifies as unique with unique contracts. Basically, if you think of, let’s say, a business that wants Coursera’s platform for its employees, that business could be, let’s say, a Fortune 500 company with lots of divisions. Every division that signed a contract as a unique customer is going to be an enterprise customer. You could have maybe 10 so-called enterprise customers that nestle up under one fortune 500 business. This is something where it’s easier to measure your retention and your growth because you’ve got customers that you’re trying to hold onto. I think we do a fairly good job. They have a more traditional dollar-based retention type of metric. They don’t call it dollar-based retention, but that’s basically what it is, where they track their enterprise customers and basically show you that the growth is either expanding or decreasing every year. That metric accounts for attrition. It doesn’t double-count new customers, meaning it doesn’t add new customers in when it’s looking at a particular cohort. It’s a pretty clean metric. At least cleaner or better described in some matrix that I’ve seen in recent annual reports and S-1s, this metric increased from about 106% in the 12 months ending 12/ 31/2019 to 114% in 2020. Nice growth there and 114% is pretty decent for this one slice of the business.
Flippen: It also shows you where management’s focus is in terms of fueling growth. When you look at the metrics, you mentioned you get a lot of insight on the consumer side, but we got a lot of metrics as it relates to its enterprise customers. In my opinion, it is pretty clear that in management things, are they going to beat the customers that are critical for financial success in the future?
Sharma: Just to wrap up our discussion on at least the enterprise metrics and metrics that are associated with the other parts of the business, this is how it all falls out in the top-line. The customer revenue or consumer revenue is two thirds of the company’s top-line. That grew at a 59% year-over-year rate last year. The enterprise business, which we’ve been talking about, so business customers and some institutions, that’s 24% of the total revenue for Coursera, I think you’re at 47% year-over-year in 2020. Then the degree’s revenue, that’s the third big revenue stream, it’s about 10% of top-line, but it’s also a fast-growing business, it’s about 60% of the total for the company. You can see, while the consumer revenue, that freemium model that brings in learners, it’s still what’s driving the engine. Increasingly, I think it’s enterprise, and to a lesser degree, this faster-growing degrees revenue business that might be accounting for a little bit more of growth and profits in the future.
Flippen: Well, and if you look at their financial performance, that’s exactly what the numbers paint right now. I think there’s a lot of metrics you can pull out here. The most critical one, in my opinion, to watch in terms of financial performance is probably just the gross margins. They were at 53% over the last year, up slightly versus 2019, whereas around just under 52%, slowly ticking upward, and management says that it’s increased not just because the business is getting more efficient, which is wonderful as they scale, but also just because of the focus on enterprise and degree-based revenue, which as you mentioned earlier, is higher-margin revenue for the business. But even with those gross margins improving, even with more of their revenue coming from higher-margin businesses, this is still a loss leading business right there operating income of -$67 million over the past 12 months, which is pretty substantial when their revenue was less than $300 million over the same time period. But it is trending in the right direction. Revenue was up nearly 60% over the last year. While some of their expenses grew more, in particular, sales and marketing, in my opinion the critical expenses, that’s research and development, G&A, general and administrative expenses grew slower than top-line growth.
In my opinion, it’s pointless to pick up part of that financial performance here, at least in too much detail. Because most of these businesses, especially businesses like Coursera, which has a consumer-facing business, as well as an entire direct salesforce aimed at pulling in enterprise customers. It’s really critical for them to spend a lot of money as they scale up their business in their early days. When you talk about doing less than $300 million in revenue on valuation, at least an equity valuation of over $7 billion, it’s clear that investors are investing for growth, so I would expect to see them continue to spend a ton of money that they don’t necessarily or they have it, but not internally generated cash on sales and marketing.
Sharma: Yeah, for sure with the cash on their balance sheet, they’ve got several years of cash burn ahead of them if they need it. I’m trying to remember, Emily, if in the S-1 I saw that phrase in the risk sections, we have never been profitable [laughs] and may never be profitable. That’s a very classic when a company has just been gunning for growth. I can’t remember if I saw this one in there, but the story that you just told, the picture that you just painted really thirds into relief that this is a company that’s facing some competition. It’s not just named competitors that are in the paid space, but also some unpaid competitors too. We’ll talk about that a little bit more in the risk section. I thought looking through the financials, it has a similar profile to so many that we’ve seen. My concern here just on those margins is while they’re improving, I wonder how much of a boost in the operating percentage, which was less of a bleed than the prior year was due to COVID, on the plus side with that direct sales force which didn’t get to operate as it normally would have last year. As they built that, that’s something that can help with that enterprise business, help it grow into a more profitable posture as a skill. We will see this is one of those things that you’ll just have to follow every quarter. Just tack on some more data and see in which direction the line items are moving. But I do like that they were able to capitalize on COVID and showed this phenomenal top-line growth rate. That’s to their advantage.
Flippen: In terms of financial performance, I didn’t mention the offset. But another critical metric is looking at what percentage of their consumer users are paid users. You mentioned 77 million users as of the end of 2020 registered active learners on their platform. Only around 3.5 million of those people have paid for courses or an offering. So around just less than 5% of total users. I’m not ready to dock points for that. This is the business of a freemium model. As you spend a lot of money getting as many users as you can into the platform, a small number of those pay, and then an even smaller number of those go onto spend a ton of money which drives virtually all of the bottom line growth. That’s what we see here. They don’t need all 77 million to be paid users to be profitable. They still need a subset to go on to be really high-value users and that will be a critical metric to watch in the future to see if people are trickling through the final that way.
Sharma: Right. You know, Emily, it wouldn’t be an episode of Motley Fool consumer goods Industry Focus if we didn’t talk brand. [laughs] I found the opening to bring in brands here. Those 77 million users, while only a small%age are paid, are doing something to extend that brand. The company markets through direct paid channels, but also through indirect channels, so SEO, optimization, and the biggest of all, the biggest unpaid channel of all, word of mouth. I think the bigger the user base, the more where you have siblings telling siblings. Yeah, just sign up for Coursera, man, you can do that course for free. I did it for free, and that helped me here. There’s something to be said for that person is a really, really wide freemium net, and then having a small percentage should actually end up as paid. That appears to be a monetizable platform. Question is, at what point does that then translate into like, what I’d love to see is operating cash flows that are growing, free cash flow positive, etc.
Flippen: One of the good hints that that could translate into those numbers is looking at what percentage of their users come through the free funnel that’s been later go on to the enterprise or business customers. I can’t remember if you mentioned this metric at the top. I apologize if I’m repeating it again for listeners, but it’s critical. I will take the liberal aid year to repeat the numbers. But in the last year, 30% of all enterprise customers and 50% of new decree learners had previously come down through the free funnel, so they were already account holders at Coursera. That’s really important to watch as well. Again, it’s a differentiator between what Coursera does versus other competitors. If they’re getting a higher rate of users coming into the free funnel converting into higher-value programs, that could compel somebody to choose to partner with Coursera over and alternatives.
Sharma: Right, and plus this really powerful idea that they’ve had, which is to generate leads off of customers. That itself is a snowballing flywheel effect. There’s definitely some momentum that they can bring out of this long term. Emily, before you lead us through a discussion of risks, let me just say a couple of things about the management team, because you’re probably wondering if the co-founders are still around, and what one of them is. Koller left Coursera in 2016. This was one of the two Stanford professors. She is a phenomenal thinker, I think for people as brilliant as these two. It’s almost difficult to stick around when you are an academic still writing papers in the real-world. But Andrew Ng has done that. He is now the chairman and he owns about 7% of shares. Koller left in 2016. Her latest venture is a drug discovery company, it’s private, it utilizes artificial intelligence and machine learning it’s called Insitro to work on drug discovery. I thought that was very interesting.
The CEO is named Jeff Maggioncalda, and he was recruited in 2017. He’s also been an entrepreneur himself and he is a Stanford grad, so a little bit of a familiar club here. He’s pretty well incentivized themselves for CEO that was brought on, and he’s got 3.2% of outstanding shares. Last thing I want to mention is that the original venture capital groups that have funded Coursera through numerous rounds are still big believers. They’re not cashing out, at least for now. Post-IPO, venture capital groups like Kleiner Perkins Caufield & Byers, one of the most well-known venture capital firms out there, collectively own about 26% of the company. Now, will they sell in the years to come, or will some of them disappear after a lock-up period? Certainly, but the signal is that the original investors pretty much believe in this company and I think they see further appreciation ahead.
Flippen: That’s a good transition to the risks here, because that within itself in the dilution that we experienced part of the IPO process is probably worth mentioning as a key risk of Coursera. I’m going to combine my biggest risk also alongside my opinion here, it’s hard to separate the two. For me, the biggest risk and what colors my opinion about this business today are actually just the challenges that exist with monetizing higher education in general. It’s funny because I look at all the individual trees at this business and I like them all, but when I look at the forest, I’m not really excited about investing in this industry. It reminds me a lot about the challenges that 2U. The businesses 2U, the ticker is TWOU. But 2U was not a one-to-one comparison without Coursera, was in the business and still is in the business of partnering with higher education providers to provide an online platform for them to digitize the course load. As businesses and as universities are moving digitally, they needed a partner to make that happen and 2U was that partner.
Again, that’s not a one-to-one comparison, but there is one similarity, one critical similarity, which is that they do have the same revenue sharing agreements with their partners. Depending on what people would pay for the courses offered through 2U and offer through Coursera, each of those businesses gets a fee. As a larger number of students move their online learning to their platforms, they get a higher percentage. You think that would be a tailwind, because obviously, digital learning has dramatically increased just not in the last year but over the last decade or so. But it’s actually interesting because as learning with digital programs got smaller, they got cheaper, and they got more competitive. Suddenly, 2U and all these others, were spending a ton of marketing dollars just to get their foot in the door with their partners. Then when they had these really lucrative contracts, they pulled in a big university where their tuition dollars were much higher and the margins were much higher. One or two things happened, either programs brought that process and housed it to save money, or they actually decreased the number of users they’re letting into the programs to keep it competitive. That negatively both of those things really hurt 2U as a business.
Well, Coursera is different in the fact that they have a consumer offering in the way that 2U never had. The focus that the business puts on making partnerships, especially with universities moving toward degree in boot camp programs, it makes me a little bit nervous, because they’re headed in a direction where 2U was and if you look at where 2U is today, they’re headed in the direction of Coursera. They’re suddenly trying to get out of the university program, getting into certificates and boot camps cheaper offerings. I just wonder if it’s a really challenging place to monetize. I worry a little bit about what the higher education landscape looks like over time. But I also acknowledged that this could be something like Peloton where I had a bad experience investing in Fitbit and I never gave Peloton a chance until very recently. I wonder if the same thing is going to happen with Coursera where I’m a little bit of a skeptic now because of my experience with 2U, but maybe I’ll give it a chance in the future. I’m curious what your thoughts are here, Asit.
Sharma: So interesting. Let me quickly give my two risks and then answer your questions. The first risk that worries me a bit is that the partners, university, they are the main partners don’t grant exclusive rights to content. There’s nothing to prevent a university once they have worked with Coursera to basically take the same degree program and just put it on another platform. That seems to me hard when you’re trying to build some competitive mode. Right now, a lot of the competitive mode is the exclusive relationships with some of the great institutions. It’s good for branding, so there is a risk there. Then also if you merge that up with what you were just talking about, Emily, there’s an expense to working with these educational partners. You have an uncertain payoff because you’ve got to do a lot of hand holding at the beginning of a relationship, and every educational institution I’ve looked at that’s gone public I think 2U is one, Coursera certainly discusses this. You’re actually putting up a lot of investment upfront and the university may not stick around, they may diminish as you just walked through the number of people taking the course.
There’s so many ways that your investment might not get recouped, but you’ve got to do that every time you start a new degree program with a university or bring university on. This is a long term risk that it’s uncertain, it’s not a slam dunk just to sign on with a new university. There are many global institutions that they don’t have relationships with that are very well regarded on a global scale, so as they expand that becomes a risk. Second that I want to talk about is competition. There’s a crowded space, I mentioned Udemy at the beginning of the podcast. There’s also LinkedIn Learning. LinkedIn bought a really popular online skills platform, I think it was called Lynda [laughs] I’m not sure if that was the name, but now it’s linked and learning and that itself is growing fairly quickly. You talked about 2U, but you know there’s also free resources. If you’re looking at building skills there are few things that are as good as a combination of YouTube and let’s see if it’s more academic Khan Academy between the two of those, you can do pretty well. You know there are so many things. Again, anecdotal, I always make fun of anecdotes and I go on and tell them [laughs] there’s so many things that I’ve learned, I become not halfway handy but one quarter handy around the house just because of YouTube. [laughs] If you don’t need the certificate, why not use YouTube Khan Academy Wikipedia? That’s actually competitive for a [..] Coursera cite in its S-1.
This alternative path where you don’t even need the freemium model that they offer you, you’ve already got your go-to sources. When you wrap all this together, what’s my opinion? Looking at 2U and Chegg at the same time, I was interested in both companies. I couldn’t put my finger on it at the time, but I want to say that I was really smart and I anticipate all these things you are seeing and we’re excited, I never really [laughs] thought 2U. But a few things bothered me and I think maybe it was just the difficulty of having a business model that at that time was dependent on institutions. Because academic institutions are ornery, they have their own way of doing things, it’s not the private sector. But I followed Chegg for the longest time before I bought it, and I really liked how focused their model was. Coursera strikes me as a company with a lot of promise, but in this competitive space, I just wonder about their ability to draw a big competitive mode where they become dominant and then you’re seeing them scale. I got to see the cash at some point in time. Show me those operating cash flows even if I can visualize them down in the future, I can really get behind the stock.
Now, so far out of the gate, it’s proving me wrong, people are very excited about this. It seems like the stock has gone up every [laughs] single day since the IPO just a few days ago. Not just by 1% or 2%, but very vigorously. That’s always a decent sign, but overtime how will this company respond when its stress tested? I don’t see quite the answer in the S-1. I don’t think they have a very tight answer. At the end of the day, it’s a company that has a lot of very laudable goals, made up with a pretty decent business model. If the space weren’t so hypercompetitive, and I go back to this because I think Udemy which has braced a lot of money through its own financing rounds will one day go public, and it could be sooner than we expect via SPAC. It could be this year, although I don’t think they’re [laughs] forecasting neither broadcasting it an IPO, it could be next year. But at some point, they’ll tap the capital markets that are public, and then you’ll have a choice. Yet one more probably traded vehicle to think through. I think in this space, online education, I prefer that focused business model. This just has too many approaches to the market. I’m a little skeptical, is my opinion.
Flippen: Wow, I didn’t expect for us to have the same opinion coming out of this conversation, but I guess we do.
Sharma: Yeah. Now, whenever this happens though, Emily, watch it prove us very wrong. [laughs]
Flippen: Inevitably. Well, Asit, as always thank you so much for joining and providing your valuable insights.
Sharma: Yes, it was a blast. I feel so much smarter for talking about online [laughs] academia for the last 45 minutes or so.
Flippen: We’re all smarter when we get to listen to you talk.
Sharma: Too kind.
Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions, you can always shoot us an email at [email protected] or tweet us @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don’t buy or sell things based solely on what you hear. Thanks to Tim Sparks for his work by screen today. For Asit Sharma, I’m Emily Flippen. Thanks for listening and Fool on!
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