Udemy May Still Have a Long Runway Ahead of it

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Written By Dean McHugh

Udemy (NASDAQ: UDMY) is a compelling investment opportunity, supported by a strong secular growth trajectory in the online education market. The transition to online education, driven by accessibility, affordability, and flexibility, presents an exciting opportunity.

Udemy’s two-sided marketplace and the resulting flywheel effect provide a competitive advantage in content creation and learner engagement. Despite recent financial challenges, Udemy is well-positioned to benefit from a recovering macroeconomic environment and is expected to return to its historical growth rate of around 20%.

Company Overview

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Udemy is a leading online learning marketplace offering a diverse range of courses to learners worldwide. As of the first quarter of 2024, Udemy hosts over 220,000 courses created by approximately 75,000 instructors, catering to over 37 million global monthly unique visitors.

The platform supports courses in 74 local languages. Revenue-wise, the Enterprise segment (Udemy Business) constitutes 58% of FY23 revenue, with the Consumer segment accounting for the remaining 42%.

The Enterprise segment is experiencing faster growth, with a 23.5% increase in the first quarter of 2024, while the Consumer segment saw a 2.5% decline. Geographically, revenue distribution is as follows: North America (40%), EMEA (30.4%), APAC (22.5%), and Latin America (7.1%).

Shift to Online Education

The shift to online education represents a major secular tailwind for Udemy. The COVID-19 pandemic significantly accelerated the transition from offline to online education, creating a “perfect storm” for online learning platforms.

The global online education market, valued at approximately $170 billion in FY23, is projected to grow to around $280 billion by the end of the decade, representing a compound annual growth rate (CAGR) of about 9%.

Several factors drive this shift:

  1. Accessibility: Online education provides almost instant access to a wide range of content, overcoming the limitations of traditional classroom settings. This is particularly beneficial for learners in remote areas, where access to subject-matter experts on complex topics like AI or quantum physics is limited.
  2. Affordability: Online education is generally cheaper than offline education, reducing the financial barriers for learners.
  3. Flexibility: Online education offers a flexible schedule, which is particularly advantageous for adults in the workforce, shift workers, and single parents who cannot commit to fixed classroom hours.

Two-Sided Marketplace and Flywheel Effect

Udemy’s two-sided marketplace model, which connects instructors with learners, is a key competitive advantage. Instructors create their own course materials, including exercises, videos, quizzes, and Q&A features, which are then submitted to Udemy for quality control. Learners purchase these courses, generating revenue for the instructors.

Content Areas with Rising Demand

Udemy leverages student usage and completion data to identify content areas with rising demand, providing feedback to instructors to enhance course enrollment, completion rates, and content quality.

This flywheel effect results in a strong content creation engine, with Udemy adding over 5,000 courses to the platform each month. More content attracts more learners, which in turn incentivizes instructors to create additional courses, further driving platform growth.

Financial Performance

In the first quarter of 2024, Udemy reported revenue of $196.8 million, reflecting an 11.6% growth rate, which exceeded consensus estimates by 100 basis points. Adjusted EBITDA reached $6.5 million, implying a 3.5% margin, also surpassing expectations.

Demand Remains Strong

Despite a 2.5% decline in Consumer revenues, the underlying demand remains strong, as evidenced by a 3.4% increase in average monthly buyers and a 7% increase in average monthly visitors.

The decline in average revenue per monthly buyer, attributed to a strong USD, resulted in a net negative impact on growth. Adjusting for foreign exchange (FX) effects, Consumer revenue was nearly flat.

The Enterprise segment demonstrated robust performance, with a 23.5% revenue growth in the first quarter, driven by strong large deal activity.

Although customer growth decelerated from 13% in the fourth quarter of 2023 to 11.9% in the first quarter of 2024, this slowdown is attributed to the challenging macroeconomic environment. The net dollar retention rate also decreased due to the high cost of capital impacting upsells.

Valuation and Future Outlook

Udemy presents an attractive upside potential, with a discounted target price of approximately $18. The secular growth tailwind for online education remains robust, and as the macroeconomic environment improves,

Udemy is expected to return to its historical growth rate of around 20%. For FY24, using the midpoint of management’s revised guidance ($800 million), followed by a growth acceleration to 20% by FY26 and FY27, Udemy is projected to achieve approximately $1.3 billion in revenue by FY27.

Management’s target of 15-20% adjusted EBITDA margins by FY27 appears achievable, given the recent strong EBITDA performance.

Using the S&P 500 Index (SPX) forward EBITDA multiple as a benchmark, an appropriate forward EBITDA valuation multiple for Udemy is around 14x, reflecting its faster growth rate compared to the market.

This yields an implied target price of $24 for FY27. Discounting this target price by a required rate of return of 12% over 2.5 years results in a present value target price of approximately $18.

Investment Risks

Several risks could impact Udemy’s growth trajectory:

  1. Prolonged Macro Weakness: Continued economic challenges could weigh on demand, particularly in the Enterprise segment, as businesses may reduce budgets for learning and development.
  2. Management Changes: The search for a new Chief Revenue Officer (CRO) introduces execution risk, as the new CRO may not align well with the existing team.
  3. AI Advancements: The development of AI technologies capable of teaching various subjects at a proficiency level comparable to human experts could disrupt Udemy’s business model in the long term.

Udemy’s Strong Positioning

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Udemy is well-positioned to capitalize on the strong secular tailwinds in the online education market. Despite recent financial challenges, the company’s two-sided marketplace model and global reach provide a solid foundation for future growth.

As the macroeconomic environment recovers, Udemy is expected to return to its historical growth trajectory. While potential risks exist, the long-term growth potential and strategic advantages make Udemy a compelling investment opportunity.


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