Description

Coursera (“COUR”) provides online education and training courses with a three-pronged model, including (1) the Consumer segment with a broad array of online training and certification courses; (2) the Degrees segment with online degrees in partnership with established universities, similar to 2U, and; (3) the Enterprise segment serving large corporations, government, and higher education institutions with online training modules.

The industry is highly competitive with low barriers to entry. COUR’s primary competitors include Pluralsight (owned by Vista) and Udemy (ticker: UDMY).  LinkedIn and several smaller VC-backed companies are also intensifying the competitive landscape.

The sourcing and subject matter of the content is what differentiates these companies. Pluralsight and COUR generate content directly and incur the related costs whereas Udemy provides a marketplace model with user generated content and a revenue-split with the creators. Udemy functions like YouTube with top-rated content flowing to the top of the funnel, thereby incentivizing high quality content.

In speaking with industry executives, we heard COUR faces multiple headwinds. First, to maintain competitive content requires constant updating for fresh, relevant content, which is tremendously expensive. This can lead to stale content relative to Udemy that pays and incentivizes creators to post as much quality content as possible. Our field contacts suggest this unique marketplace model is creating a flywheel for Udemy.

A second intensifying headwind is customer scrutiny of ROI spend. This software is a cost center for enterprise customers – this does not translate to incremental revenue, and productivity gains have thus far proved elusive to employers.  The expense is highly fungible, particularly for VC-backed companies facing financing headwinds.  COVID generated a demand spike as customers scrambled to keep employees trained remotely without scrutinizing the cost or ROI; however, that trend is changing according to our field contacts, and the ROI is very difficult to measure or understand.

COUR also continues to burn cash as evidenced in their Q1 2022 earnings release from April 27, 2022. FCF was ($42 MM) in Q122 vs. ($9 MM) in Q121.  Not only were earnings meaningfully lower, but A/R was a sizeable use of CF in Q122. The company claims this will reverse in the future.  It’s also important to note that the Q122 FCF excludes $20 MM of SBC vs. $5 MM in Q121.  So, real FCF / earnings losses are widening at even greater rates than the headline numbers suggest – and supporting the view that customer acquisition and content costs are pressuring the business as enterprise customers increasingly struggle to understand what returns they receive from the investment. 

The street loves COUR and the company has only 4% short interest. All 16 sell-side firms that cover the company have re-affirmed Buy ratings after the company’s Q1 2022 earnings release, citing consistency of growth as proving its competitive differentiation.

Going forward, consensus expects ~25% growth for COUR (similar expectations for UDMY as well) – and COUR trades for 5.1x forward revenue vs. 2.4x for UDMY. Given the growth profiles on these companies, these multiples are relatively low to begin with.  However, we believe that growth will drop to the mid-to-high-teens, whereby COUR would reasonably trade at 3x sales as we’ve seen with other software companies that unexpectedly decelerate to sub-20% growth. That would translate to fair value of $10/share, 40% downside, as the business disappoints investors who then question the model’s viability.

Catalyst

Earnings / slowing growth