School’s back, and the pandemic has set some students behind. That creates a hazard that your high-schooler will soon ask for help with the quadratic formula. Don’t panic. Respond in a way that shows that you know that’s algebra, not a car engine additive. Then, riff about the importance of learning to seek knowledge independently, while pulling out your credit card and subscribing to an online tutor. For about $20 a month, you can avoid having to admit you remember everything about high school and college except the course material.
A more difficult call is whether to make a stock investment in education technology, or ed tech. Industry spending has surged, as have stock listings and share prices. Soon, investors will learn whether that’s a pandemic pop or the start of a longer shift toward hybrid learning—part during class hours, and part available anytime online. Companies that stand to profit include ones that went public years ago, like Chegg (CHGG) and 2U (TWOU), and ones that have done so recently amid a surge in industry spending, like Duolingo (DUOL) and PowerSchool Holdings (PWSC). And there are private players like Udemy that investors are watching for news of a stock offering.
Chegg traces its roots to an Iowa State University message-board service for things like finding scholarships and internships. The name, a portmanteau of chicken and egg, as in which came first, is a nod to recent graduates who feel they need experience to get a job, and need a job to get experience. The company changed its focus to textbook rentals back around the time that Netflix went into streaming. But today, it makes most of its money from schoolwork help, including an app that can snap a photo of a handwritten math problem and produce step-by-step instructions for solving it.
“Other than the cost of education, the No. 1 reason people drop out is they get stuck and there’s nobody to help them get unstuck,” says CEO Dan Rosensweig. “We do that.”
Chegg gets new customers through Google searches that bring students to one of the 67 million questions it has answered in its database. Word-of-mouth brings them in, too. Revenue growth in the company’s services division jumped from 31% in 2019, before the pandemic, to 57% last year. One reason is that when college students were sent home, they lost their on-campus support, says Jeff Silber, who covers ed tech for BMO Capital Markets. Some students also lost creatively acquired account access.
“You had a fraternity that may have just gotten one license or one subscription and shared it with all the frat brothers,” Silber says. “That was a lot harder to do when everybody was more dispersed.”
Extra security measures have reduced password sharing. If Chegg’s growth is fizzling, it certainly wasn’t apparent last quarter, when kids were back in classrooms and services revenue rose 38%—faster than the prepandemic rate. “I think people miscategorize Chegg as a pandemic stock,” the CEO says. “What we do isn’t dependent on where you are physically. What we do depends on whether or not you need help.”
Some 16 out of 18 analysts who cover Chegg stock recommend buying it, but the price has more than doubled since the end of 2019, resulting in a market value of $12 billion, which will take some growing into. The company is seen generating close to $200 million in free cash this year, rising to $300 million over the next two years. BMO’s Silber calls Chegg a winner but downgraded it in May of last year, at about $64, on valuation. “I was right for about a week,” he says. The stock ended the year at $90. This year, it’s down a few dollars.
One of Silber’s top stock picks is 2U, which partners with more than 80 universities, including Harvard, Yale, and Stanford, to put course materials online, especially for short courses or what are called boot camps, which focus on specific, marketable skills. “After two to three months, you can probably get a job that you wouldn’t have been able to get beforehand,” he says. The company is valued at $2.8 billion, is expected to grow revenue by 22% this year, and doesn’t yet generate consistently positive free cash.
Another pick is Stride (LRN), which changed its name from K12 last year and operates public schools online. It’s valued at $1.4 billion, with little sales growth expected over the next two years, and free cash pegged at about $150 million a year. Silber says the company’s push into short courses for job skills could give growth a lift.
Rosensweig became CEO at Chegg after running the videogame series Guitar Hero. He says he lacks game skills but became a hero with his teenage girls when he signed Taylor Swift, Eminem, and Jay-Z for the game. Walmart asked him to tell the latter two to clean up their lyrics.
“If I have to get shelf space from you by trying to do something your corporate office wants that has nothing to do with what your consumer wants, I can’t be successful,” he says. He sold through Amazon.com (AMZN) instead, and once at Chegg, that episode influenced his decision to deal directly with students, not institutions.
Rosensweig has a long list of complaints about college. Half of high school students don’t go, and of the half that do, 43% don’t get a degree, he says. And of those who get degrees, many take six years and graduate with low salaries and high debt. So what would he change? Professors should teach more and research less, he says. He favors more hybrid learning, as you might imagine, and faster learning, with more focus on skills, and maybe some consolidation. “The state of California—why do we have 115 community colleges that are all trying to teach the same subjects online?” he asks. “Why not just have one that takes the best of all of them?”
As for the debate over free college, Rosensweig says nothing is free. “I’m a big believer that corporations should pay,” he says. “We’re the beneficiary of your education.”
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