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1 Overlooked Stock Pick for the AI Revolution

Barchart - Tue Sep 5, 2023

The broader basket of edu-tech stocks seems to have been long forgotten after enduring incredibly painful falls off their peak levels. Shares of Coursera (COUR) and Udemy (UDMY) are each down more than 66% from their all-time highs. Shares of the two edu-tech pioneers have been sagging for quite a few quarters since going live on the public markets back in 2021.

Higher education is, indeed, in need of a technological update. And it's the more promising edu-tech plays that can help bring higher education into the age of work-from-home (WFH) and artificial intelligence (AI)

Undoubtedly, growth and margins may not be where they need to be in this rising interest rate environment. That's a significant reason why shares of edu-tech plays have been punished so severely. Over the medium term, it seems doubtful that rates will turn on a dime and provide relief to the many battered, forward-looking growth plays that took a massive hit to the chin in 2022. Fortunately, firms like Coursera may still be able to grow in an environment that's less hospitable to the smaller technological innovators.

I do think pessimism has been overblown when it comes to some of the smaller-cap, high-growth players that are embracing new technology to disrupt markets. The market for digital learning is still evolving, but it has the potential to be quite sizeable. 

Although it's unclear which companies will be able to rise as leaders 10-15 years from now, I do think the industry and its market participants are worth keeping an eye on. Personally, Coursera is my top pick to play the digitization of education trend.

Edu-tech Stocks: A Tough Environment, But Secular Tailwinds Could Prevail

Could it be that Wall Street is overlooking the magnitude of long-term growth to be had in edu-tech stocks? Perhaps. 

Though many of the edu-tech stocks do seem pretty tough to value at this juncture (and many certainly seem like value traps after shedding a majority of their value from peak to trough), I do think the technological capabilities of names like Coursera, Udemy, and even Chegg (CHGG) are being overlooked.

Further, secular trends, including AI-driven job displacement, could bring forth the need for re-training, re-certification, and re-education for white- and blue-collar workers alike, who may need to change careers to adapt to the AI age. 

Undoubtedly, going back to college or university can seem daunting for those seeking a later-in-life career shift. Firms like Coursera and Udemy make it not only more convenient to break into a new career, but they're also affordable and more practical.

As edu-tech firms improve their platforms while bringing down the barriers to higher education, I do find their growth profiles to be underestimated. 

Of course, growth and lack of profitability are not every investor's cup of tea at a time when rates only seem to go higher. Regardless, I do think we're reaching a point where valuations in the top edu-tech plays are becoming a tad too depressed.

Let's have a closer look at Coursera, a top edu-tech firm that certainly stands out as the best of the batch.

Coursera: Digital Degrees Could Be the Way of the Future

Coursera is one of the edu-tech top dogs that could transform the way we think about post-secondary education. The company has a slew of intriguing courses, "nano degrees," and certifications that are becoming increasingly valued by employers. 

More recently, the company teamed up with various accredited universities, including the University of Colorado Boulder, to offer full-fledged degrees. Through the Coursera platform, eligible applicants can earn a Master's Degree in Data Science without having to set foot on campus. Undoubtedly, data science is an emerging field that seems incredibly valuable in the data-driven age of AI. As we're propelled further into the AI revolution, perhaps this type of degree through the Coursera platform will be an incredible asset to find work in an era of AI displacement.

Looking ahead, Coursera may be in a spot to partner with more universities as they look to offer a growing number of degree programs to a global market. Indeed, the colleges and universities of the future may very well be fully (or mostly) digital, thanks to Coursera.

Growth is Still Alive & Well at Coursera

For the second quarter, the company reported strong results. Revenues climbed 23% year over year to $153.7 million, while earnings per share came in at $0.00, beating estimates calling for a $0.10 per-share loss.

With nearly 130 million registered learners and growing momentum in its degree business, Coursera stands out as a top edu-tech play for investors who still value long-term growth. Should an economic recession hit in 2024 while more workers get displaced by AI, look for enrollments to keep marching higher from here, all while Coursera looks to introduce new courses, degrees, and certifications.

Could Coursera be the go-to investment to play AI displacement? It could be. In any case, I view the company as a defensive grower that may actually be able to benefit when the economy sags, job losses mount, and demand for re-training rises.

At writing, the $2.60 billion company trades at 4.98 times price-to-sales (P/S). In my humble opinion, that's far too cheap for a company that seems to have a front-row seat to the digitization of education.

The Bottom Line

Higher rates and market-wide calls for greater profitability have dinged the edu-tech stocks. But as a wave of AI displacement hits the world over the coming decade, edu-tech companies like Coursera stand to benefit most as people look to get up to speed with the jobs of the future.

On the date of publication, Joey Frenette did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.