The Death of EdTech IPOs? Sector Rotations and Stock Declines from LTM Highs
Much has been written on the post-pandemic rush of edtech IPOs over the past year, with Coursera, Duolingo, Udacity, Desire2Learn, PowerSchool, and Instructure, all managing successful traditional IPOs in 2021.
These IPOs have been particularly exciting to those of us who still remember way back to 13 months ago when there were just 3 publicly traded edtech companies (post-PluralSight buyout).
For the last 15 years, market commentators like Michael Moe have called for a rush of education investment activity seeing as how the industry represents 9% of GDP, the second largest contribution after healthcare. And yet, year after year, the education sector still represents a negligible share of public stock market activity. Shares of GDP are irrelevant when investors are focused on shares of market indexes. And over the last 20 years, with just a dozen publicly traded education companies, stock returns will always be weighed down the sector’s relative under-indexing (by comparison, there were over 30 education stocks during the dotCom era of 1998 and 2002).
And so, the last year of education stock IPOs (and even a few SPACs) has brought particular excitement to investors, entrepreneurs and industry hanger-ons like me. The exit activity has coincided with a a trebling of venture investment into the sector as compared to pre-pandemic levels. This growth is even more impressive when considering the regulatory death of the for-profit education industry in China, which had recently come to represent the majority of all global venture flows in education. Indeed there are another 30+ edtech “unicorns” now waiting to go public or sell, not to mention all the multi-billion dollar private equity backed publishers and software companies (Renaissance, McGraw Hill, Blackboard, Ellucian, Cambium, PluralSight, Imagine Learning, Frontline, etc.).
Of course, these recent IPOs and other more speculative edtech stocks have not been spared from the recent inflation-fueled sector rotation to pro-cyclical and value based stocks. Indeed, Dr. Sean Gallagher recently shared through a tweet storm his observations that edtech seemed to be taking the recent market downturn even worse than comparable small cap tech plays (as measured against the NASDAQ small cap stock index). A healthy thread ensued given his tagging of some of my favorite education industry investors like Jason Palmer, Jason Stoffer, and Daniel Pianko. In particular Jason Palmer referenced a timely analysis by the Wall Street Journal showing the sell-off of most sectors of the market. Indeed the number of companies trading near 52 week lows relative to the recent highs of the overall S&P 500 index has been highlighted as a historical predictor of an impending stock market crash.
The WSJ analysis did not include education stocks, which further shows how little this sector rates in the market, despite the fact we can now count nearly 40 publicly traded education companies and (depending upon your definition) at least a dozen technology-driven companies in the K-12, Higher Education and Corporate Learning markets (i.e., edtech stocks). And so, I have taken it upon myself to run the numbers and try to create a pretty bubble chart like the WSJ one, only specific to education.
As my chart shows, performance within the more speculative New Higher Education Models of MOOCs, OPM, online tutoring, and p2p learning (which captures 4 of the recent US IPOs* and 1 of the recent SPACs which caught Dr. Gallaghers eye), has been dreadful. Even two companies that have long been public, 2U and Chegg, are down over 70% from their recent highs. I think this can be attributed to both the current market sentiment away from less profitable growth stories in the face of inflation worries and the remarkable school-from-home pandemic pumps these stocks just recently enjoyed (in other words, these stocks had that much farther to fall). Conversely, higher margin, slower growth legacy publishers are trading near there 52 week highs (with the exception of Pearson, which has a large OPM business and is also working through its tenth year of business transformation stories).
The majority of the education market is down about 20–35% from recent highs, which is in-line with the other sector declines in the WSJ analysis. With inflation driving investors to rotate out of speculative growth into value, seeking to benefit from the typically positive correlation between pro-cyclical consumer, retail, energy and banking stock returns with interest rates, it is not surprising the broad universe of education stocks is down. The sector is largely a-cyclical and the legacy higher education providers (i.e., for-profit proprietary schools) have even been considered counter-cyclical. Personally, I am glad I invested in the publishers at their lows and am happily buying more 2U, seeking to lower my dollar cost average in this beat-up bellwether. And if you also like to invest in out-of-favor stocks, buying when the market is selling, perhaps I can interest you in a China based education company, Bright Scholar Education Holdings (BEDU)?
*The four IPOs of newer online higher education models include MOOCs Coursera and Udemy, language learning app Duolingo and (via Australia) US OPM provider Keypath Education, while Nerdy (dba Varsity Tutors) went public via SPAC.
