Author: Joyce Chen, Graphic: Ming Dong
The BRB Bottomline
The online education industry is expected to experience rapid growth during the COVID-19 pandemic since the majority of schools are closed. The leading online education companies such as Chegg, Coursera, and Udacity may have promising long-term growth due to the COVID-19 lockdown, but they may not be optimal investments as of now.
Online Education Industry Overview
Online education stocks have been one of the hottest areas to look at in recent years. The rising costs of college education and textbooks compes students to search for a digital education platform with cheaper prices. According to the recent report from Follett, since 1978, college textbooks have risen 812 percent in price—more than twice as fast as the price of a new home. This means a book purchased in 1978 for $25 would now cost $203. To combat the rising cost of college textbooks, many students have shifted their focus to digital education platforms.
Though the online education industry has experienced rapid growth during the coronavirus pandemic, the statistics show that even before COVID-19, there was already high growth and adoption in education technology with global edtech investments reaching $18.66 billion in 2019, and the overall market for online education is projected to reach $350 Billion by 2025.
The redefinition of learning spaces in 2010 helped transition learning spaces from traditional classroom methods of teaching towards workshop-like environments. In conjunction with this, the ‘lessons’ changed toward more interactive methods of discussions and collaborative learning. Such transformations of the learning space helped address students’ individual needs, requirements , and preferences. The recent coronavirus pandemic also serves as a catalyst for the growth of the online education industry as most schools are closed and face-to-face classes are suspended due to concerns for students’ safety.
Hence, all the industrial tailwinds have brought momentum to online education stocks. Investors are optimistic about the prospects of the industry and believe that it’s time to buy online education stocks.
Potential Challenges and Case Studies
However, there are still some potential challenges in the online education industry that imply that although the industry might have long-term growth in the future, an online education stock may not be a good choice for investors to buy right now. The potential challenges such as the high costs of the higher education digital system, supplementary nature of online education platform for traditional education, uncertainty of the persistence of coronavirus pandemic, quality and accreditation for the online tutors, and the lack of in-person interactions with not only the teachers as well as classmates may hinder the growth for the online education industry.
Therefore, the investors should be cautious about their decision of whether or not to invest in online education stocks at this time. In this article, we will focus mainly on three leading online education companies—Chegg, Inc.; Coursera; and Udacity—to examine how the potential challenges that exist in the industry may adversely impact their stocks’ growth.
Chegg is a direct-to-student learning platform that provides digital and physical textbook rentals, online tutoring, and other student services. It allows students to find human help on its learning platform through a network of live tutors. Recently, its stock (NYSE: CHGG) has a 150% upside due to the increase in its revenue by 35% to $131.6 million and is expected to have long-term growth after the COVID-19 pandemic with 25% earnings growth annually.
Chegg is viewed as a promising stock to follow for long-term investment mainly because of its remarkable increase in margins, cheaper and convenient platform to buy college textbooks, and its potentiality during the COVID-19 pandemic.
Furthermore, looking at recent school openings and closures, our current state of uncertainty is likely to persist for the near future. Therefore, online education assistance is needed at this time. Though teachers may still provide lectures and office hours virtually, students still experience difficulties when reaching out to the teachers for help mainly due to the time zone differences and late response issues. Therefore, Chegg’s convenient and professional learning platform is favored by many students.
However, although Chegg is expected to have long-term growth in the future, it may not be the right time to buy this stock for now as there are some potential challenges.
Since students were already moving toward virtual learning through Chegg in greater numbers before schools were required to transition to online education, it will not be expected to have rapid growth due to the outbreak of COVID-19. Before the COVID-19 outbreak, Chegg already had 3.9 million subscribers with a steady customer growth rate at 29% year-over-year. Since Chegg has already acquired a large customer base and had a steady customer growth rate, the COVID-19 outbreak may not add great value to its revenue growth.
Also, the economy’s return to normalcy can be a signal of the resumption of the established ways for schooling, which can be a threat to Chegg’s earnings growth in future fiscal years since 64% of Chegg’s customers use Chegg for answering academic questions. If school returns back to normal, students will be able to reach out to their teachers in-person. Hence, the frequency and the necessity of using Chegg as a platform for academic assistance may fall.
Furthermore, the high cost of the higher education digital system may have an adverse effect on Chegg’s future growth. Chegg has generated a great number of operating expenses. Though its total operating expenses decreased from 71% in the previous year to 57% in the most recent quarter, Chegg still has a very low EBITDA margin of 11.7%. This may hint that Chegg may fail to drive a stronger net margin in the future due to the high cost of education digital systems. Its high operating expenses may be a sign of its inability to control its costs and make its business more profitable in the future. Hence, Chegg may not be an optimal investment choice for the investor as its return on investment in the future years is not expected to significantly increase.
Coursera is an American massive open online course provider. It offers an extensive list of online courses, specializations, degrees, and professional and master track courses to students. Recently, Coursera’s enrollments have quintupled year over year. Benefiting from the COVID-19 outbreak and the closure of schools, Coursera has seen more than 25 million enrollments since mid-March, a 520% increase from the same period last year.
Coursera is viewed as a promising company to invest in for now mainly due to the diversified courses that it provides, cheaper prices, remarkable growth margins, and the COVID-19 outbreak.
Though Coursera demonstrated its charming potential for future growth, it may not be a good investment for the investors at this time.
Although there was a dramatic increase in enrollment in March due to COVID-19, we cannot tell for the long-term since students can receive education in school when everything returns to normal. Considering the fact that over 75% of its customers use Coursera only as a supplementary tool for their study and school education is still their primary choice, Coursera cannot replace traditional education. Therefore, this fact may hinder Coursera’s potential growth in the future and imply that its platform cannot fully replace traditional education. Hence, there is expected to be a revenue and enrollment recession after the COVID-19 pandemic ends and students go back to school.
Moreover, although Coursera can be seen as a virtual classroom for the students to learn, it is not just the classroom that prompts many students to study internationally, but also the irreplaceable cultural experiences that international study offers. Therefore, international students may be more likely to use the online education platform as a supplement tool for school materials than domestic students. Since Coursera’s users come from over 29 countries, its international users may still like to have traditional education in order to gain better cultural experience through in-person study. Therefore, Coursera’s online education platform may not be able to replace traditional education due to its significant customer portion of international students.
Other issues, such as uncertainty over accreditation and quality control, also remain unresolved. Since many instructors from Coursera work part-time, it’s hard to evaluate the consistent quality of the course. Also, since the cross-institutional credit systems are a challenge even for traditional education systems, the flexibility of online learning could make this even more chaotic. Because Coursera does not have specified and well-tailored rules for the credit exchange system, the operation process can be tedious and disordered.
Udacity is an American massive open online course provider aimed at professional adults and students. Its mission is to train the world’s workforce in the careers of the future. It provides various courses about programming, computer science, and data science that help students to be prepared for their future career path. Recently, Udemy has revealed a 260% increase in annual recurring revenue growth.
Udacity is viewed as a promising company to invest in for now mainly due to the sharp increase in demand from businesses, government agencies, and learners looking to accelerate digital transformation and develop skills in technologies as well as the career-oriented courses that help students prepare for future career paths in advance.
However, this stock may not be a good investment right now as there are some potential challenges.
Although there is a dramatic increase in annual recurring revenue growth, Udacity may lose its customers due to its relatively high charges for their courses. Its most popular programs, Nanodegrees, used to cost $199 per month last year. However, since then, their price increased significantly, reaching $499 per month. Given the fact that the competition in the online education industry is highly intense and customers are sensitive to the prices, Udacity’s relatively high price may threaten its ability to retain and acquire its customers if there are other alternative options with lower prices. For example, when you compare Udacity’s Nanodegrees with the specializations featured on Coursera, it is quite difficult to justify the price of $499 when you could pay only $40. In terms of depth, complexity, and course content, both e-Learning platforms have plenty of similarities, and they both offer good value.
Furthermore, Udacity also suffers from uncertainty over accreditation and quality control. Unlike other online education platforms that choose their tutors based on those people’s academic credentials, Udacity chooses its instructors based on their work experience instead. Therefore, while many of the instructors from other education platforms are university professors, Udacity’s instructors come from various companies such as YouTube, Amazon, Google, and Facebook. It can cause the issue of unproven credentials since those who have a lot of work experience may not be good at teaching the knowledge as the university professors do.
Though investors are excited about the rapid growth of the online education industry due to the outbreak of the COVID-19 pandemic and the closings of schools, by examining leading online education companies such as Chegg, Coursera, and Udacity, we find that this industry may not be a good choice to invest in at this time due to many potential challenges and uncertainties. The challenges such as the high costs of the higher education digital system, supplementary nature of online education platform for the traditional education, uncertainty of the persistence of coronavirus pandemic, quality and accreditation for the online tutors, and the lack of in-person interactions with teachers and classmates may hinder the growth for the online education industry. Therefore, investors should be cautious about their decision to invest in online education.
Joyce is a sophomore double majoring in economics and political science at UC Berkeley. Her interests in start-ups and emerging technology companies led to join BRB’s investing column. Outside of BRB, Joyce’s interests include painting, jogging, playing the violin, watching movies and reading books. Joyce also enjoys exploring different restaurants. She loves sushi and hotpot the most.