EdTech Public Market Valuations
Following record EdTech venture funding in 2020, 2021 saw continued strong venture investment with another record year. The year was also marked by strong public market activity, with several high profile EdTech IPOs such as Coursera, Duolingo, Instructure, and Udemy. In the second half of the year, concerns over inflation, a rising interest rate environment and lofty valuations led to a move against companies that experienced large COVID accelerations. The selloff and profit-taking resulted in multiples compression which has continued into the early part of 2022.
By Jack Lothrop
Abstract & Key Takeaways
The multiples compression in EdTech is primarily the result of changes in the macro environment, which is affecting technology, software, and growth stocks at large. With rising inflation and interest rates that are ready to follow, the market environment for growth stocks changed significantly over the past 6 months. The real interest rate, at a historically low -6%, drove money flows to the “Big 10”, Alternatives, and Cryptocurriencies.
Compared to 6 months ago, public investors no longer value growth companies on 1–2 year forward revenue but on current margins and profitability.
Weighing 40% of NASDAQ, the “Big 10” largest market cap companies effectively acted as a replacement to “no interest Bonds”, advancing +30% in 2021 while 30% of NASDAQ companies actually declined more than 15% or more during that same period. EdTech stocks similarly experienced profit-taking and multiple compression in-line with growth stocks overall, despite strong fundamentals.
Late-stage EdTech investors have to exercise stronger pricing and valuation discipline. Public markets, as the hopeful ultimate buyers of growth-stage investments, are no longer supportive of generous valuations. Udemy went public at a $4.0B valuation and raised its Series F at a post-money valuation of $3.3B, but is worth $1.8B today while other companies such as Coursera and Duolingo have dipped below their IPO prices.
Current EdTech Multiples
- Companies with strong fundamentals, in the form of revenue growth and profitability, can expect to have higher valuation multiples. The companies with the highest valuation premiums trade at 5.0–10.0x NTM Revenue and are largely B2B SaaS platforms.
Regardless of market cycles and appetite for speculative risk, strong fundamentals will continue to be the most important driver of performance in public and private markets alike. While we would expect to see some correction in private market valuations at some point in the future, the most important thing EdTech companies can do is build world-class businesses by focusing on the 5Ps Framework with strong unit economics, user lifetime value and ROE (“Return on Education”).
Summary
- Since the middle of 2021, public EdTech stocks growing 25%+ have seen a pullback in their valuation multiples from 15x average EV/NTM to 5x today. This has occurred in tandem with overall declines in technology and software stocks (EMCLOUD and ARKK companies) from 18x and 17x average EV/NTM Revenue to 11x and 7x over the same time period, respectively [Figure 6.1 and Figure 6.2].
- EdTech stocks have historically traded at multiples below technology and software stocks, but through COVID experienced stronger growth and a corresponding boost in valuation multiples which are now returning to normalized historical levels. EdTech company fundamentals have improved, with revenue estimates increasing over the course of the year and gross margins expanding [Figure 3, Figure 4 and Figure 9].
- Adjusting for the declines in both valuation multiples and growth rates on a relative basis, the EV/NTM Revenue/Growth multiples hovered at ~0.20x EV/Revenue/Growth for much of the year before declines in 2022 [Figure 7].
- For every additional percentage in expected revenue growth, an EdTech company can expect to have a ~0.1x higher revenue multiple while EMCLOUD and ARKK companies can expect to have a ~0.3x higher revenue multiple.
- Early stage EdTech (Series A) valuations in 2021 moved in the opposite direction of the public markets, with growth rates and multiples nearly doubling [Figure 11].
Note: The universe of public EdTech stocks has been somewhat limited historically, especially with recent take-privates like Pluralsight, but we expect to see continued IPO activity.
Macro Environment
- The annual inflation rate in the US increased from 2.6% in March to 7.5% in January, the fast annual pace since 1982. This corresponded with a decrease in Average EV/NTM revenue multiples of 15x to 5x among EdTech stocks growing 25%+.
- Inflation is now significantly above interest rates which are likely to increase and reduce the spread, leading to lower valuation multiples.
- In the broader market, the forward P/E ratio of the S&P 500 has come down from 24x at the beginning of 2021 to 20x today.
- The CCI has also dropped back below 100 after making steady gains since the height of COVID in April 2020, indicating a more pessimistic attitude among consumers regarding the future developments in the economy.
Growth Rates — Actual vs. Estimates
- EdTech, EMCLOUD & ARKK companies, have consistently beat expectations with few exceptions on a quarterly basis.
- Most EdTech companies have not released Q4 results yet, however, all that have reported were in line with or exceeded forecasts: Coursera ($115M actual vs. $112M forecast), 2U ($244M actual vs. $243M forecast), Udemy ($137M actual vs. $132M forecast) and Chegg ($207M actual vs. $195M forecast).
Revenue Revision
- Since the beginning of 2021, revenue estimates for FY 2021 and 2022 across the EdTech segment were, with few exceptions, revised upwards.
Growth Rates
- Average and median growth rates have slowly, but steadily come down at similar paces across all company subsets. Expected NTM growth rates in EdTech are in line with EMCLOUD and ARKK stocks, around the 30% range.
Valuation Multiples
- EdTech EV/NTM Revenue multiples for companies have declined from 15x in June to 5x today. EMCLOUD and ARKK companies have experienced a more gradual, but substantial decline over this time period from 18x and 17x average EV/NTM Revenue to 11x and 7x over the same time period, respectively.
Growth Adjusted Valuation Multiples
- On a growth-adjusted basis, multiples have stayed relatively constant, but ARKK and EMCLOUD companies are receiving premium multiples for similar levels of growth.
Stock Price Performance
- EdTech stocks, EMCLOUD and ARKK have underperformed the S&P and NASDAQ over the course of the year.
Gross Margin
- The revenue growth in EdTech stocks has been accompanied by consistent margins, with some improvements over the course of the year.
Revenue Multiples vs. Growth and Rule of 40
- On a profitability adjusted basis, EdTech companies are undervalued relative to their EMCLOUD and ARKK peers.
- B2B SaaS platforms exhibiting high growth and relatively strong margins such as PowerSchool, Instructure and Docebo tend to trade more closely with other software companies in the EMCLOUD index.
- Consumer companies such as Chegg, Udemy, 2U and Nerdy are valued at relatively lower multiples compared to their growth rates and Rule of 40.
Private EdTech Early Stage Valuations (Series A)
- Mean round was $16.3M for 20% dilution, at a pre-money valuation of 9.2x 2022 revenue
- Mean forecasted revenue growth was 593% (from 2021 to 2022)
- Median round was $14.5M for 20% dilution, at a pre-money valuation of 5.5x 2022 revenue
- Median forecasted revenue growth was 275% (from 2021 to 2022)
- H2 2021 saw similar round sizes and dilution as H1, but the median revenue multiple and median forecasted growth rate nearly doubled (from 4.6x to 10.0x and from 253% to 513%, respectively)
Appendix
Higher Ed Enrollment
- Undergraduate enrollment continued to decline, falling by 3.5% in fall 2021, following the prior year’s drop of 4.5% for a combined 7.8% decline since fall of 2019.
Through January 17, the overall numbers of accounts created by high school seniors (+12.6%), applicant counts (+13.2%), total applications (+19.8%), and applications per applicant (+6%) each increased from 2019–20.
