Coursera and Duolingo: Contrasting Fortunes in the EdTech Sector

Coursera: Growth Should Improve From Here (NYSE:COUR)

Operating trends support growth >10%, with strong performance in consumer and degree segments, and potential for higher multiples and attractive returns. Summary I rate Coursera, Inc. (NYSE:COUR) with a buy rating. I believe growth could accelerate from 10% to the mid-teens over the next two years when the macro environment gets better, using the 10% growth rate in 2Q24 as the "trough" growth level. As growth accelerates, I believe the market will re-rate multiples upward, which translates to attractive returns. Earnings results update In the latest quarter (2Q24) reported on July 25th, COUR grew revenue by 11% y/y, primarily driven by the consumer segment, which saw 11.9% y/y revenue growth to $97.3 million. Enterprise segment growth came slightly lower than overall growth at 8.4%, driving total revenue to $58.7 million. As for the Degree segment, performance remained solid, with y/y revenue growth of ~14%, driving total revenue to $14.3 million. Profitability trended nicely upwards, with gross margin up 90bps y/y to 54.2% and EBITDA margin up from -1.9% in 2Q23 to 6.1% in 2Q24. Operating trends support >10% growth With how the current operating trends are, I think there is a good chance for growth to accelerate to >10% when the macro environment improves. My idea is that if COUR can grow at 10% in the current macro situation, it surely can grow faster when things get better. In the consumer segment, COUR managed to add another 7 million new learners, marking the 15th consecutive quarter of >5 million learners added in a quarter. As of 2Q23, COUR has more than 150 million learners. Importantly, the number of paid learner conversions has improved. This is a very interesting point as one would have expected lesser learner adds as consumers pull back on spending. According to management, free to pay is "better than stabilizing," which means it has improved. On this, it is also worth highlighting that COUR is indeed benefiting from GenAI (not a headwind) and this appears to be one of the key drivers for adding new learners. In addition to that, COUR also stepped up by launching more entry-level certificates in 2Q24 (2Q24 added more certificates than the entire FY22), with new titles from partners like Google Cloud, IBM, Meta, and Microsoft. Ultimately, all these have enabled COUR to grow consumer segment revenue by 12%, and I expect growth to sustain itself at this range as long as COUR continues to add more offerings (which is clearly resonating with learners). Mentioned in the 2Q24 earnings call: We are actually seeing a little bit better than stabilization. So, it certainly has not gotten worse and we are seeing some positive indications there. Obviously, it goes hand-in-hand with the content launches as well. I mean, content that is valuable, new, in demand by learners, and especially, we are excited about these job specific credentials. We are getting the credential, we hope, and anticipate that if learners in, especially emerging markets are interested in winning new types of job opportunities because they know how to use GenAI, a credential will help. In developed economies like Europe, and North America, learning skills and having a credential that says, I know how to do my job with AI and I could do it productively and effectively, we think that will be something that becomes a real value proposition and it could also help with conversion rates. But we're excited that generative AI and the team-specific, job specific titles and credentials will be effective in continuing to see stabilization improvement of the conversion rates." In the enterprise segment, although growth came in at less than 10% (at 8.4%), I was very encouraged by the growth in the number of paid enterprise customers (which grew 17% y/y to 1,511). Notably, the additions were across all verticals (in particular, businesses). Like the consumer segment, this indicates that underlying demand is strong. The negative aspect here is that average revenue per customer continued its downward trend, declining by 8.2% y/y. This drop was due to the enterprise client staying tight on their budget, which resulted in a pullback in spending, particularly on expansion deals. While this is certainly not positive for 2Q24 performance, this actually led me to believe that COUR will see growth acceleration when the macro environment recovers. The growth equation here is: (1) new customer adds (function of volume and revenue/customer) + (2) expansion deals. Despite the poor macro environment, (1) remains solid, as paid enterprise customers grew 17%, so this level of growth should sustain itself when the macroeconomy recovers. As for (2), budget scrutiny should ease when the macroeconomy improves as well, especially when interest rates come down. Additionally, I believe AI adoption is a massive tailwind for this segment. COUR's GenAI Academy product focused on giving every employee and executive a general understanding of GenAI (which I think is a great education-led strategy as users will be able to know the potential of adoption of GenAI). In the quarter, COUR launched Academy for Teams, a product that helps enterprises leverage GenAI to improve productivity. With more products under its belt (and I expect COUR to roll out more related products), COUR's comprehensive offering should enable it to capture demand in this area. Lastly, for the Degrees segment, while this is still a small part of the business, it was still encouraging to see strong growth momentum (in fact, y/y growth accelerated from 10% in 1Q24 to 14% in 2Q24). As COUR continues to build its degree program pipeline (COUR added 1 new program in 2Q24), I would expect this growth trend to continue, especially since total degree students continue to grow at ~20%. In any case, having this segment grow by >10% is good enough. Valuation I believe COUR is worth 29% more than the current share price. My target price is based on FY26 ~$900 million in revenue and a forward revenue multiple of 1x. Revenue bridge: I believe the 10% growth rate seen in 2Q24 is likely to be the "trough" growth rate for the business. The logic is that if COUR can grow 10% in this horrible demand environment, it surely can grow better in a better demand environment, and the catalyst is going to be an upcoming rate cut (expected). Growth initiatives, like innovating new GenAI products and adding new certificates and degrees, should also continue to support growth. My forward expectation is for growth to gradually climb back to mid-teens growth, which shouldn't be hard to do since the business was growing at >20% previously. Valuation justification: An improved growth rate should justify a higher multiple (especially since COUR margins have improved vs. the past). I think 1x forward revenue is doable since the stock traded up to ~1.3x just a few days ago, indicating that the market was willing to re-rate COUR higher (the stock traded down subsequently, probably because of the recent sell-down). Investment Risk The enterprise net retention rate of 93% continues to be weak for the fifth consecutive quarter. While I think this is due to enterprise customers being tight on their budget, the worry is that this will become the norm as enterprises realize they do not need to spend so much on this. On macro risk, delayed macro recovery will also impact the timing of growth acceleration. If the headwind persists, COUR may continue to grow only at 10%, which is not a growth rate that will drive up valuation multiples, in my opinion. Conclusion My positive view on COUR is because the business was able to sustain 10% revenue growth amidst a challenging macro environment. Moreover, COUR grew the number of learners in both the consumer and enterprise segments. Especially notable was the improvement in free to paid conversion improving in the consumer segment. While near-term headwinds such as slowing enterprise spending persist, I believe this will turn better as the macro environment recovers. I'm a passionate investor with a strong foundation in fundamental analysis and a keen eye for identifying undervalued companies with long-term growth potential. My investment approach is a blend of value investing principles and a focus on long-term growth. I believe in buying quality companies at a discount to their intrinsic value and holding them for the long haul, allowing them to compound their earnings and shareholder returns. Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Duolingo's Great Quarter Confirms It's A Steal: Upgrading To Strong Buy

The stock is 28% lower than its all-time high and an absolute steal at this price in my view. I first recommended Duolingo (NASDAQ:DUOL) in June 2024 and bought it for the following reasons: It's Learning and Investment Flywheels, which give it huge competitive advantages. It's unique gamified and social media strategies to get and keep clients. Strong AI and data analytics. Market leadership in language learning, which will continue to propel its growth. Growth prospects beyond languages. Very strong operational leverage, with a cash flow margin of 29%. Rapid growth in adjusted earnings. Duolingo reported Q2-2024 results on August 7th, which exceeded estimates, and reaffirmed my thesis that this was a company that would continue to grow fast and even better, grow profitably throwing out lots of operating cash. I liked it at $205, and I like it a lot better at $169. I'm upgrading it to a strong buy recommendation. Revenue at $178Mn grew 41% YoY and beat estimates by 1%. Adjusted EPS of $0.51 beat estimates by a whopping 19 cents. Duolingo has been profitable for the last 5 quarters now and the earnings growth is resembling a hockey stick growing 1,175%. Duolingo grew Adjusted EBITDA margins to 27% earning $48Mn - another massive growth of 130%, again beating estimates handily by a whopping 26%. This is fantastic operating leverage at work as increased revenues of 41%, spread over slower-growing fixed operating expenses resulted in increased profits of 130%! This trend will only continue, SG&A expenses grew slower at 14%. As I mentioned in my previous article Duolingo has done an amazing job leveraging social media with memes and characters to increase its outreach and customer retention. Its use of streaks results in strong customer acquisition and retention without expensive marketing and sales budgets. Guidance: From the table above, Q3-24 guidance has increased by a small amount to $186.7-$189.7, or $188.2 at the mid-point, just north of analysts' average estimate of $188Mn. Management expects adjusted EBITDA to come in between $40.1Mn to $42.7. From the table below, full-year revenues should grow to $734.8Mn at mid-point, slightly higher than analysts' estimate of $733Mn - 38% growth YoY. Management pointed out this is a substantial and difficult bar to clear because of the tremendous tailwind they got last when Duolingo was featured in the movie Barbie. Duolingo also guided to an additional 5% Adjusted EBITDA growth from $161.1 to $176.5 to $175.5 to $184.6. Duolingo should earn 24 to 25% in adjusted EBITDA margin for the full year. Strikingly good for a company that went public just 3 years ago and was founded 12 years ago. Duolingo has come a long way from the paltry revenue of $71Mn in 2019. The 5-year revenue CAGR from $71Mn to $733Mn in 2024 is a whopping 60%, and the best part is, that adjusted earnings are now coming in at 2.5x that revenue number. Duolingo's operating metrics: In Q2, Duolingo continued with the stellar work of the previous quarter and the previous 3 years. From the table below, DAUs increased faster than Q1 at 59%, as did MAUs at 40%. Paid subscribers continued to grow at a rapid of 52% a tad slower than the 54% in Q1. Subscription bookings grew 47% slightly faster than Q1's pace of 46%. Non-Subscription bookings grew only 7% a big drop from the 20% growth in Q1, but that hardly deterred total booking growth, which also came in at a fast clip of 38% compared to 41% in Q1. Bookings growth as compared to the past three years is slowing down from the blistering pace of mid-forties to the high thirties as Duolingo gets bigger. Mid to high-thirties booking growth is still fantastic and Duolingo should end 2024 with 38% revenue growth, again a phenomenon number as it approaches the Billion Dollar mark in 2025. I stressed this in my last article as well - Duolingo is a cash flow machine, which is very, very impressive for a company of its size, it was cash flow positive from 2021 and even made GAAP operating profits for the first time in 2023, a short 11 years after its founding. In Q2-24, Cash Flow Margins was 31%. Duolingo continues to do an excellent job reigning in SGA, which grew 14% in Q2-24, a fraction of revenue growth - it doesn't waste marketing and sales dollars but instead invests in TikTok memes that work. Dilution was low at 4%, in line with 2% dilution in Q1-24. Reigning in SBC - Share-based compensation was only $20Mn in Q2, lower than $25Mn in Q1, and trending lower than the SBC of $95Mn in 2023. Key takeaways from the Q2-24 quarter The $48Mn Adjusted EBITDA was Duolingo's highest ever as is their margin at 24.5%, a full 7 points higher than 2023's 17%. Duolingo's Family plan The Family Plan has shown excellent growth and now is used by 20% of its subscribers. CEO, Luis von Ahn mentioned that this was a sleeper, Duolingo had not pushed it, and not too many existing customers were even aware of it. It was only when Duolingo saw the pick-up in Q2, that they decided to focus on growing this plan. The family plan has a greater retention rate than average. It is nice to have something that sells by itself! Most companies would die to have that problem. This is what CEO Luis von Ahn had to say. So the family plan was something that we built a few years ago and didn't touch. We just built it, left it there and it grew by itself, which was awesome. Once we realized it was growing so much by itself, we put a team behind it. It's a few months. But already they've made a number of changes and we're starting -- we've started seeing more and more penetration of the family plan. Duolingo's top-tier Max plan The other impact came from the AI-enabled Duolingo Max. From the earnings call. At the end of Q2, we began to see the impact of Duolingo Max, our highest-priced tier with AI- enabled features. The rollout of Max has progressed so that, as of now, it's available in five countries in, sorry, in five courses in 27 countries, covering about 15% of our DAUs. This includes AI-powered immersive conversational practice, one of the most requested features over the last 10 years. The Max builds up on Duolingo's strengths of more conversational and immersive features and since it is the highest-priced tier, it will contribute even more to revenues as it continues to get rolled out. It's just available to 15% of DAUs right now. Going forward, management will take a call on how to place some of the AI features that are now exclusively on Max, because of their higher cost. (At least they're getting paid for that AI spend, Duolingo answered the question I think Alphabet ducked.) The Friends streak CEO Luis von Ahn also spoke about the Friends streak (Duolingo has a feature that lets up to 5 friends go on a streak together) as a catalyst for better engagement and usage. Duolingo has always been about streaks, they have maximized that feature to their best advantage. Duolingo estimates that about 7Mn DAUs have a streak longer than 365 days, it's doubled in the last year and a half and most importantly the ones with long streaks are likely subscribers. Duolingo's English language growth Another one of Duolingo's sleeper growth products could be learning English for non-English speaking users. The English Language Tests segment was 9% of 2023 revenues so they do have significant presence and expertise there. Duolingo has its highest penetration in the US and European markets, but there hasn't been much penetration in the rest of the world, and this could be another growth catalyst going forward. Working on content for English language learners is a focus area, and they want to make sure that the content is really good before they start customer outreach and monetization. AI is a friend In my previous article, I asserted that AI was not a threat, instead, Duolingo would leverage its data to get a huge competitive advantage over any generic competing product. It has become their go-to tool to create content in a few months for what would take 5 years! What is also impressive is the richness of these enhancements helping the interactive, immersive experience, which is Duolingo's calling card. Here's the CEO from the earnings call, absolutely spot on... emphasis mine. Some of it is just better processes from ourselves. But a lot of it has to do with AI and we're really excited about that. I mean, the two big uses are creating content that is kind of pre-made and then it's served to the users. But what I'm more excited about is that, nowadays we can create certain pieces of content so fast that these are things that just we couldn't do before. I don't want to spend five years creating content for anything. Today, we ended up building a pretty similar feature and it turns out we can create all of that content in a matter of months. So I'm very excited about the fact that this just allows us to create a lot more engaging content. Certainly the multimodal models are helping on my like GPT-4o, because we're kind of be -- we are going to be doing voice-to-voice. And so that helps a lot. Another thing that I'm pretty excited about is being able to explain math concepts to you with diagrams. Language models are not quite there yet, but I think it's going to, either with fine tuning or some sort of specific training, I think we'll be able to explain almost any math concept to you with a clever diagram. That's much better than reading two paragraphs of explanation. So I'm very excited about that. I think we'll be able to teach math significantly more effectively because of that. Secondly, AI cannot do what they're doing or what their target market needs. For example, even Google Translate does a good job of language translation. It works for a traveler to use it in France to communicate with a non-English speaker. But Duolingo's users are not casual users, they tend to be hobbyists and AI is not going to replace that. CEO, Luis von Ahn believes that the other group that is not likely to be replaced are those learning another language for work - they're not going to be resorting to their phones or headphones during or for work. Upgrading Duolingo to strong buy I bought some more around $160-$165 and I am upgrading it to a strong buy; besides the great quarter, there are several competitive advantages and growth catalysts that continue to make Duolingo an excellent company to invest in. Duolingo has become part of the zeitgeist - in my earlier article I had spoken about how Duolingo was not perceived to be a good enough guide for serious language learning, but clearly, the trends favor conversational learning, sharing and immersive experiences, and gaming interaction rather than excellence by rote. The Streak with Friends is another example of Duolingo having its nose on the zeitgeist. There will be other Barbies for Duolingo to leverage in my opinion, this is still a company in its first innings. I haven't changed my valuation base case, now I suspect it could be conservative. In my last valuation, I had recommended buying Duolingo at 12x sales, well that's dropped to 9.5x, with 30% sales growth projected for the next 3 years. The P/S ratio drops to less than 6 in 2026. Similarly, I had projected 98% earnings growth, which the last quarter and management's guidance has vindicated and then some. The current P/E of 87 drops to 38 in 2026, when earnings growth remains more than 50% in 2026 - now your PEG ratio has dropped below 1. That is a steal for a company with so many competitive advantages such as: A fast-growing application, that is already using AI for product enhancements and monetizing it to great effect from customers, not businesses that take 6-9 months to close a deal. A market leader with an excellent freemium model giving it tremendous scale. A fast-growing trendy online, and mobile platform very much part of the TikTok and Instagram generation. Strong learning flywheel, which increases engagement and targeting, besides furthering their data moat. Strong investment flywheel, from the cash generated from paid subscribers put to continuing R&D efforts for product enhancement to lure in more users. If there were a great model for monetizing AI this would be it. Hopefully, investors will give it the AI valuation and multiple at some point. Financial Analyst and Portfolio Manager for more than 3 decades, with a 5 Star tipranks rating in the top 6%. I love to find great, undervalued, best in class companies using the same fundamental analysis and strategies used by Warren Buffett and Peter Lynch. Analyst's Disclosure: I/we have a beneficial long position in the shares of DUOL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.