2023-05-11 11:01:35 ET
Summary
- Udemy is an online learning marketplace offering 200,000+ courses covering a wide range of topics.
- The e-learning market is predicted to reach $476 billion by 2027.
- Udemy stands out in the e-learning space due to its vast range of course offerings and ease of integration with existing workflows.
- The company plans to reduce sales and marketing expenses and achieve a breakeven adjusted EBITDA margin by FY24.
Investment Thesis
Udemy, Inc. ( UDMY ) is an online marketplace for learning that provides more than 200,000 courses covering a wide range of topics, from professional to personal. The platform has two offerings: a direct-to-consumer marketplace and a business subscription offering for companies to train their employees. The number of learners using the platform has grown significantly, from 1 million in 2014 to over 62 million to date. The e-learning market is poised for growth, expected to reach $476 billion by 2027. Udemy is well-positioned to benefit from the long-term demand for e-learning, and the company's current valuation multiple provides a good opportunity to get in, in my view.
The Need for Upskilling Bodes Well for Digital Learning Platforms
It is incredibly challenging for employees to maintain relevant technology skills in today's ever-changing technology landscape. The pandemic has further accelerated the shift to online learning, especially for businesses that can no longer provide in-person training to their employees but still require them to be proficient in the latest technologies. According to a survey by the World Economic Forum, nearly 40% of workers will need to acquire new skills in a period of six months or less, and 94% of business leaders expect their employees to learn new skills on the job. This necessitates a new model for digital learning and skills sharing, and 84% of employers report that COVID-19 has increased the need to digitize. In addition to technical courses, corporations are now seeking to provide avocational courses in areas like mindfulness or culinary arts to create more well-rounded employees. Udemy Business can help fulfil this need by offering a wide range of courses in both professional and personal areas of interest.
Low Market Penetration Remains a Catalyst for Growth
The e-learning market is expected to see growth driven by several factors, including digital transformation, creator and skills economies, remote work, and workforce reskilling. The market is predicted to reach $476 billion by 2027, with $171 billion in corporate learning alone. Udemy has set growth targets of 23-25% revenue growth for FY24 and 25-30% in the long term, with Udemy Business driving the majority of this growth. The company plans to reduce sales and marketing expenses as a percentage of revenue and achieve a breakeven Adjusted EBITDA margin by FY24 and a sustainable 15-20% margin in the long term. Despite weak performance in the consumer segment, I expect Udemy to benefit from the long-term demand for e-learning. The company trades at low multiples compared to its peers, and its future valuation will depend on its ability to achieve its targets, particularly in the Udemy Business segment. While there may be short-term challenges, I believe that Udemy is well-positioned to capitalize on the growing demand for e-learning.
Online Learning Space Is Saturated but Udemy Has Strong Differentiators
Over the past few years, the online learning space has become increasingly popular due to its accessibility and affordability. However, with the proliferation of online learning providers, it can be challenging to determine which one is the best. While no single company is likely to dominate the market, certain providers are better positioned than others. Udemy is one such provider that stands out due to its vast range of course offerings and ease of integration with existing workflows.
Udemy's catalog of over 200,000 courses covers a wide variety of subjects, ranging from technical courses for employee upskilling to personal courses for hobbies like cooking and photography. This breadth of content makes Udemy a one-stop-shop for both cutting-edge technology courses and niche avocational courses on yoga and dance. Other online learning platforms like Pluralsight are strong products for skilling technology teams and developers in areas like cloud computing and machine learning. However, they do not offer courses on non-technical activities like mindfulness and meditation. Coursera (COUR) is a strong platform for graduate learning and professional classes led by top universities and companies, but it offers only a fraction of the courses that Udemy provides.
Another advantage of Udemy is the ease with which its platform can be integrated into a company's existing systems. Udemy Business offers learning playbooks that allow enterprises to combine UB courses with their own in-house training programs. This feature makes it possible for companies to incorporate learning into their overall workflow, including learning management systems and learning experience platforms. For example, Udemy Business integrates with platforms like ServiceNow, Inc. ( NOW ), Workday, Inc. ( WDAY ), SAP SuccessFactors, and Slack. This integration enables a customer to track, sync, and report learning progress in its HR systems, allowing it to monitor potential knowledge gaps and assess the platform's overall return on investment.
Given its breadth of content and ease of integration, Udemy Business is well-positioned to drive a reacceleration in revenue growth through 2023. The demand for online learning resources continues to grow, driven by factors such as the COVID-19 pandemic, businesses undergoing digital transformations, and the desire for workers to upskill and reskill to improve their career opportunities. As such, Udemy is likely to remain a popular choice for learners, both at the consumer level and through business training/learning.
Points of Contention
The company's revenue for FY23 is expected to be $719 million, which is lower than what was initially expected by the market due to a 3% foreign exchange headwind. There will be a slowdown in revenue growth for Udemy Business, from mid-40% in 1Q23 to mid-30% throughout the year, but it will still make up 60% of total revenue by year-end. The company's sales cycles have become longer since Q3, affecting the low end of the market first and then the enterprise side in Q4. Some deals were pushed to Q1, and it is uncertain how many have closed. The company expects sales cycles to continue to elongate throughout FY23. As a result, the company reduced spending on go-to-market teams in impacted regions and segments and will focus on being more strategic with R&D.
Moreover, the company's management has observed a decrease in demand from small and medium-sized businesses and has adjusted its hiring pace in the commercial segment. However, the company is optimistic about its enterprise customers and has hired more sales reps to drive growth in this segment. It typically takes 9 months for reps to become fully productive, so the company expects growth to pick up in the middle of next year.
Valuation & Risk
Udemy is currently trading at an EV/Sales multiple of 1.28x, which is a significant discount from its historical multiple. The stock is currently trading at a slight premium to the median of the market; however, I believe a higher multiple is justified given Udemy's high revenue growth rate. My end of FY 2023 price target of $11.9 implies a 2x EV/sales multiple on FY24 revenue estimates.
The key risk to my price target remains the variability in the company's consumption mix post-pandemic. After the pandemic, there has been variability in the consumption mix of the company's revenue. About 57% of revenue comes from consumers who purchase classes individually rather than through a subscription. Consumer growth surged to a peak of 77% in the September 2020 quarter but has since declined as people return to work and the economy reopens. The consumption-based model presents more variability and risk to the company's revenue results.
UDMY Valuation Grade (Seeking Alpha)
Conclusion
The online learning market has been benefitting from the digital transformation of businesses, the need for upskilling in a rapidly evolving tech environment and workers seeking to improve their career prospects through upskilling and reskilling. Udemy has established itself as a leading marketplace for learners, offering both consumer and business training/learning options. Udemy is well-positioned to capitalize on the growing e-learning market, which is expected to reach $476 billion by 2027. I believe despite weak performance in the consumer segment, Udemy is expected to benefit from the long-term demand for e-learning and continue to grow at a high double-digit rate. The company trades at an attractive multiple, and hence I remain bullish on the stock.
For further details see:
Udemy: A Differentiated Player In The E-Learning Space