2023-10-26 07:04:08 ET
Summary
- Udemy is experiencing impressive growth and may become profitable in the future.
- Workplace trends, such as remote work and reskilling, are benefiting Udemy's business model.
- Udemy's focus on Udemy Business and cost-cutting measures may contribute to its growth and potential profitability.
- If the company can't get its costs under control, this could be a risky play.
Udemy (UDMY) is a marketplace for educators and those seeking to get education in a specialized topic. It allows experts to create online classes where people sign up for a fee and it also allows people to review and rate classes which allows some classes to stand out. The company has an interesting business and it's been posting impressive growth lately. If this growth continues, it will be only a matter of time before the company becomes profitable and is able to reward its investors.
We live in a rapidly changing world and the workplace is changing just as rapidly as everything else. Among many changes we are seeing in the workplace today two are highly relevant for Udemy. One, more and more people are working remotely, away from offices, and teams are collaborating with each other across the globe as if they are in the same room. This also applies to how they get their training and how they get educated. Many employees will go to the internet to search for new information or obtain new skills before they go anywhere else because the internet offers quick and convenient access to vast amounts of information that is difficult if not impossible to get anywhere else. This is directly related to Udemy's business plan and should benefit the company for years to come.
The second workplace trend that's affecting Udemy's business is that employees are reskilling. Jobs are getting increasingly more specialized and more sophisticated and employees are expected to become experts in more skills than they ever had to. According to one study , up to 40% of American workers will need to learn new skills or reskill themselves in order to remain relevant at their jobs. This could include learning a new coding language, new technique, new tool, or new way of doing things.
Combine these two trends together and you have a picture where many employees will need to develop new skills and they will most likely obtain those new skills online at the convenience of their homes.
Furthermore, according to a Gallup study , employees who took online classes to learn a new skill or participate in an upskilling program saw their income rise by 8.6% or $8,000 on average. This is a huge return on investment for employees even if the upskilling program they participated in cost them money out of pocket.
Udemy had its IPO just a couple of years ago but its revenues are already up 42% since then. The company has been seeing significant growth not only in its revenues but in every aspect of its business. For example, the company now hosts 74k experts (instructors), 57 million learners, 213k courses offered in 75 languages, and 200 million hours of learning annually. Every single one of those metrics grew in double digits in the last year and they are likely to keep growing at a similar rate for the foreseeable future so the company is experiencing rapid growth in more than just its revenues. In all likelihood we will see more classes offered by more instructors in more languages and more people from more countries will pay for those courses unless something disruptive happens.
People are more likely to return and take more courses from a provider if they see good outcomes from the courses they've already completed. Udemy's long-term goal is to convert those people who come to take 1-2 courses into recurring customers who come and take course after course. The company's course rating system should help it retain customers because if people are happy with the value offered by a course they will rate it high and more people will take that course after seeing its high score. As high-quality courses get in front of people and low-quality courses lose visibility, the average quality of the course should improve. It is also possible that courses with higher ratings will be able to charge higher prices than courses with lower ratings which could improve the company's margins. The company also offers data access and analytical tools to its instructors so that they can adjust their courses in order to better fit the needs of learners.
Speaking of margins, there is a huge gap between the company's gross margins and its operating margins. While the company's gross margin is impressive at 56%, its operating margin of -24% leaves a lot to be desired and represents a gap of 80% against its gross margin which is pretty large.
Why is this? Since going IPO, the company's revenues grew by 42% but its R&D costs grew by 110% and its SG&A (Selling General & Admin) expenses grew by 67%. The company's costs are growing at a faster rate than its revenues are and it will need to get its costs under control or all this revenue growth will be for nothing.
Earlier this year, the company announced a lay-off where it reduced its number of employees by 10%. This didn't come as a huge surprise since a lot of tech companies have been announcing similar actions since last fall and it was largely expected given the company's cost structure. When the company announces its quarterly results in early November we will see if it was able to achieve its cost-cutting goals and whether more cost-cutting measures will be needed.
This year the company put a lot of emphasis into its Udemy Business plan. This segment of the company sells licenses to companies in batches instead of individuals and it uses a subscription model where the cost of each license starts at $360. During last August's earnings call, the company mentioned how corporations spend more than $1,300 on each employee on average for training and this pricing should serve as a bargain for them.
To give you a sense of the size of the potential savings a recent study found that the average per employee spend on L&D by employers worldwide was approximately $1300 per head in 2021. The cost for one Udemy Business license starts at just $360 per year.
Since there is a heavy focus on cost-cutting these days, Udemy Business might be able to sell more license contracts to businesses that want to reduce their training budget but it's doubtful that Udemy can replace all of a company's training needs since many corporate training courses are designed specifically for each company's specific needs, corporate culture and methods of doing business which is unique. Still, it should help Udemy's growth story.
Since the company doesn't have profits, it's difficult to find a metric that can be used to calculate its valuation. One metric available to us is price to sales metric. This metric is often times used to value start-up companies in their pre-profit hypergrowth stage. When Udemy had its IPO it was selling for 7.5 times its annual revenues but now it's only selling for 1.9 times annual revenues. Based on this one metric, this is the cheapest the company has traded since its IPO. Still, keep in mind that the company has yet to post a profit.
One of the biggest risk factors for this company is that it may not be able to get its costs under control and suffer loss after loss even with the rapid growth it's enjoying. Lately, the company has been spending a lot of R&D money on improving its Udemy Business but now that the product has reached a level of sustainability, R&D costs associated with this product should be leveling off for a while. The company will have to show that it is at least on its path to profitability and we'll be watching its next earnings report very closely in a couple of weeks.
Another risk for this company is the possibility of trends changing. The company benefited greatly from post-COVID trends of working-from-home and studying-from-home but these trends might be changing again with several large companies imposing return-to-office mandates. If the trend shifts in a meaningful way, the company might be affected significantly.
All in all, Udemy is a promising company with a bright future if it can get its costs under control and show a path to profitability. The company operates in a new market and its growth so far has been impressive. It will just have to find a way to convert this growth into profitability to become a good investment.
For further details see:
Udemy: Impressive Growth Story That Lacks Profitability So Far