We are big fans of Coursera (NYSE: COURT), have been taking courses on the platform for years and have been following them as a company since their IPO. There’s a lot to love about the company and we thinks it has what it takes to become a valuable platform company, even if today’s financials don’t yet reflect a superior economy. We also appreciate that it is a public benefit corporation founded on the belief that learning has the power to change the world.
Coursera should be close to reaching critical mass for its platform to start showing superior economics, with 97 million registered learners from around the world and more than 250 educator partners. So far, this has mainly translated into rapid growth, with revenue growth of 41% in 2021 and growth prospects of 30% in 2022.
In addition to the number of users and partners, we can get an idea of the excellent product-market fit the company has achieved by looking at the high ratings of its apps. It has a 4.1 star rating on the Google Play Store and 4.8 on the Apple App Store. We have to say that with all these qualitative measures so strong, we thought the company’s finances would be stronger, but as we will see, it seems that profitability is still relatively far away.
In addition, the Coursera.org website has grown in popularity, in the last 90 days alone it has climbed 24 positions in the global rankings to become the 238th most visited website in the world. It is also worth noting that there remains a vast opportunity to increase users from around the world, with most users currently coming from the United States, China, and India.
Coursera’s revenue has grown rapidly, last year alone growing from around $300 million per year to over $400 million per year.
What disappointed us a bit was the lack of operational leverage displayed. Coursera’s operating margin actually declined, despite the increase in revenue and gross profit margin. Coursera’s gross profit margin is a very respectable 60%, but a far cry from other software companies that actually manage to top 80%. The good news is that gross margins are increasing, driven by the shift in revenue mix towards higher margin products.
Coursera has also benefited from the pandemic, which has inflated the number of users signing up to its platform. Pre-pandemic, the company averaged approximately 2 million new learner enrollments per quarter, post-pandemic that increased to approximately 5 million new learner enrollments per quarter.
As good as all of these indicators are, we have to remember that Coursera is trading at a high valuation, as we can see below, despite the stock falling significantly over the past year, the company is still trading at a market capitalization greater than $3 billion, so we will analyze whether this can justify such a price.
At first glance, the stocks don’t look too expensive, trading at ~5x EV/Revenue over the past twelve months and ~4.2x EV/Revenue forward. However, there are a few things to remember before declaring stocks cheap: Coursera’s gross margin is considerably lower than the leading software/SaaS companies, with margins around 60% instead of >80% for the best in their category. Second, we still don’t see operating leverage from increased sales. It might just be the business whose primary goal is growth, but at some point it needs to show some willingness to moderate rising costs/expenses. Third, although revenue growth remains high, it has moderated and is no longer in the hyper growth phase. Given the lack of a clear path to profitability at this point, the maximum we would currently be willing to pay for shares is around 2x EV/Revenue, or nearly $10 per share. We don’t know if it will fetch such prices, but unless the company does better cost control, we’d rather stay away from this opportunity.
About a year ago, the company was showing year-over-year revenue growth of >60%, but that has slowed significantly to the level of about 30-40%. There’s nothing wrong with growing a business 30% every year, but once the hyper growth phase is over, investors will be well served to start asking questions about margins and profitability.
At least the increase in gross profit margin coupled with the increase in sales has led to rapid growth in gross margin. However, the gross profit is still relatively small compared to the market cap of >$3 billion. The company has a significant amount of cash on hand, but we believe much of it will be used to continue fueling revenue and platform growth.
The chart below illustrates the main point we’ve tried to make so far, which is that the company simply shows no signs of operating leverage or spending control. As can be seen, all categories of “fixed costs” are increasing very rapidly. While we can understand investing heavily in R&D to ensure the platform stays state-of-the-art, we’re far less pleased to see general and administrative expenses skyrocket as well.
The company has offered financial guidance for the first quarter of 2022 and for the full year 2022. We again find revenue growth more than acceptable, but we are disappointed that even a below-average measure as adjusted EBITDA is still significantly negative. We believe the company needs to work much harder on controlling costs and improving margins.
We value the quality of the Coursera platform and the company’s mission to bring quality education at affordable prices around the world. We believe that at some point the company should start showing a much more attractive economy reflecting the competitive advantages of being a dominant platform. However, we believe the company must also balance growth and cost control, and until it does, we believe it should not be bought unless the stock price compensates for the risk. profitability. As things stand, we wouldn’t be interested in buying the shares unless they were approaching around $10 per share. We would certainly be willing to pay a lot more if we started to see operational leverage in future results and better corporate control over expenses.