2023-08-10 02:19:15 ET
Summary
- Udemy's buy rating is supported by growth in Udemy Business and the implementation of AI tools.
- Udemy is on track to achieve positive EBITDA and drive strong EBITDA growth in the coming quarters.
- Udemy's potential for accelerated EBITDA growth and improved profitability position it for a higher valuation.
Overview
My recommendation for Udemy ( UDMY ) is a buy rating, as I expect growth to continue being supported by Udemy Business [UB] and the implementation of AI tools. As the top line grows, UDMY should see strong EBITDA growth. As UDMY shows positive EBITDA, I expect it to trade at least in line with peers.
Note that I previously gave a buy rating for UDMY due to the business being on track to continue reaping the benefits of market consolidation in its Business segment and also take advantage of the opportunity related to AI.
Recent results & updates
UDMY's 2Q23 results were excellent, with revenue growth of 16.4%, which was higher than the consensus estimate of 13% growth, and a positive adj. EBITDA margin of 1.1% for the first time ever. Udemy Business [UB] continues to be a bright spot for UDMY, growing by >36% and accounting for 57% of total revenue as of the most recent reporting period, which is in line with my projections for this business unit. In addition, management emphasized that 200 badges covering 160 certification topics and 30 subject areas are available on Udemy Badging for businesses right now. If things keep moving along at their current clip, I have no doubt that UB will continue to contribute significantly to the expansion of the business.
UB wasn't the sole factor contributing to growth. The second quarter results have to some extent validated my earlier viewpoint, as I emphasized the potential of AI in a previous post. Since ChatGPT's introduction, UDMY has witnessed more than 1.4 million students enrolling in a variety of Gen AI courses, totaling over a thousand. Just in the second quarter of 2023, there was a sequential increase of over 30% in the total consumption of AI content minutes. Despite encountering more challenging overarching trends within the quarter, UDMY managed to enhance its competitive success rates in Q2. This was attributed to the persistent appeal of its content and strategy in incorporating AI into the platform.
As a result of all these growth factors, UDMY's top line should continue to increase, which should lead to even higher EBITDA margins. Take note that EBITDA has turned positive; from here on out, I expect UDMY to experience a strong surge in EBITDA growth over the coming quarters as it expands from its current, relatively modest base. My guess is that this is at least in part why management has reiterated hopes for positive 2H23 adj. EBITDA and increased the FY23 adj. EBITDA margin guide.
However, it is worth noting that the management highlighted the ongoing presence of extended sales cycles due to more careful evaluation of deals and a hesitance to allocate additional budget for learning and development. This isn't a significant cause for alarm at the moment as management also observed that the investment per employee for upskilling and reskilling remains fairly consistent. The fact that management anticipates revenue growth for UB to be in the lower range of around 30% also suggests that things are still not as bad as it sounds.
Valuation
Author's valuation model
According to my model, UDMY is valued at $15.37 in FY24, representing a 46% increase. While I am positive on the business front, especially on the UB and AI fronts, I am also cognizant of the deteriorating outlook for the near term. I have reduced my growth assumptions to reflect management guidance (management now believes total FY24 revenue growth will be lower than the 23-25% guide). I am now modeling mid-teen growth, a major step down to reflect a more conservative approach.
However, I hold my assumption for the multiple that UDMY should trade at, which is 2x revenue. Relative to other educational services peers, UDMY clearly has a better growth profile. The reason I believe it is trading at a discount is its lack of profitability, which is turning around. As UDMY shows accelerated EBITDA growth as I expected, the market should rerate multiples higher, up from the current 1.5x.
Summary
My buy recommendation for UDMY stock remains intact, supported by UB growth and the positive impact from the integration of AI tools. Strong 2Q23 results, including a 16.4% revenue growth and positive EBITDA margin, underscore the company's progress. UB's impressive 36% growth and AI course enrollments further bolster this outlook. While challenges such as prolonged sales cycles exist, UDMY's stability in upskilling investment and anticipated UB revenue growth signal resilience. Although short-term concerns have led to adjusted growth assumptions, UDMY's potential for accelerated EBITDA growth and improved profitability should drive market sentiment and multiples higher.
For further details see:
Udemy: Guidance Revised Downwards, But EBITDA Growth Still Strong