Coursera Stock: This Is The Price We Would Be Willing To Buy (NYSE:COUR)

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We are big fans of Coursera (NYSE:COUR), have taken courses on the platform for years, and have been following them as a company since their IPO . There is a lot to like about the company and we believe it has what it takes to become a valuable platform business, even if today’s financials don’t yet reflect superior economics. We also like that it is a Public Benefit Corporation founded on the belief that learning has the power to change the world.

Coursera should be getting close to reaching critical mass for its platform to start displaying superior economics, with 97 million registered learners from around the world and 250+ Educator Partners. So far this has mostly been reflected in fast growth, with revenue growing 41% in 2021, and with 30% growth outlook in 2022.

In addition to the number of users and partners, we can get an idea of the excellent product-market fit that the company has achieved looking at its high app ratings. It has a 4.1 star rating on the Google Play Store and 4.8 in the Apple App Store. We have to say that with all these qualitative metrics so strong we though the financials of the company would be stronger, but as we’ll see it seems that profitability is still relatively far away.

Also the Coursera.org website has been gaining in popularity, just in the last 90 days it has climbed 24 positions in the global ranking to become the #238 most visited website in the world. It is also interesting that there remains a vast opportunity to increase users from around the world, with most users currently coming from the US, China, and India.

Coursera Website Metrics

Alexa

Financials

Revenue has been growing quickly for Coursera, just in the past year it has gone from a run-rate of ~$300 million per year, to over $400 million per year.

Coursera revenue
Data by YCharts

What has us a little disappointed is the lack of operating leverage displayed. Coursera’s operating margin has actually been declining, despite the increase in both revenue and gross profit margin. Coursera’s gross profit margin is a very respectable 60%, but far from other software companies that actually manage to exceed 80%. The good news is that gross margins are expanding, driven by revenue mix shift to the higher margin products.

Coursera gross profit margin and operating margin
Data by YCharts

Coursera was also a beneficiary of the pandemic, which turbo-charged the number of users registering on its platform. Before the pandemic the company was averaging ~2 million new learner registrations per quarter, after the pandemic that has gone up to ~5 million new registrations per quarter.

Coursera Learners Growth

Coursera Investor Presentation

As good as all these metrics are we have to remember that Coursera is trading at a high valuation, as we can see below, despite the significant decline in the shares for the last year the company is still trading with a market cap exceeding $3 billion, so we’ll analyze if it can justify such a price tag.

Coursera market cap
Data by YCharts

Valuation

At first glance shares don’t seem overly expensive trading at ~5x trailing twelve months EV/Revenues, and ~4.2x forward EV/Revenues. However there are a few of things to remember before declaring shares cheap: Coursera’s gross margin is considerably below that of top Software/SaaS businesses, with margins ~60% instead of >80% for best-in-class. Second, we are still not seeing operating leverage resulting from higher sales. This could be simply the company operating with growth as its main objective, but at some point it has to show some willingness to moderate ballooning costs/expenses. Third, while revenue growth remains high it has moderated and is no longer in the hyper growth stage. Given the lack of a clear path to profitability at this stage, the most we would currently be willing to pay for the shares is ~2x EV/Revenues, or close to $10 a share. We do not know if it will reach such prices, but unless the company does a better job at controlling costs we would rather stay on the sidelines on this opportunity.

Coursera Ev to revenues
Data by YCharts

About a year ago the company was delivering year over year revenue growth of >60%, however that has materially decelerated to the ~30-40% level. There is nothing wrong with growing a business at 30% every year, but once the hyper growth phase is over investors will be well served to start asking questions about margins and profitability.

Coursera revenue
Data by YCharts

At least the increase in gross profit margin coupled with the increasing sales has resulted in quickly growing gross profit. However gross profit is still relatively modest compared to the market cap of > $3 billion. The company has a significant amount of cash, but we believe much of it will be used to continue fueling revenue and platform growth.

Coursera gross profit
Data by YCharts

The graph below illustrates the main point we have been trying to make so far, that the company is just not showing any signs of operating leverage or expense control. As can be seen, all “fixed cost” categories are increasing really quickly. While we can maybe understand heavily investing in R&D to make sure the platform stays cutting-edge, we are a lot less happy with seeing general and administrative expenses ballooning as well.

Coursera general and administrative expense, sales and marketing expense, and research and development expense
Data by YCharts

2022 Guidance

The company offered financial guidance for Q1 2022 and for the full year 2022. We once again find revenue growth more than acceptable, but are disappointed that even a sub-par measure like adjusted EBITDA is still guided to be significantly negative. We do believe the company has to work a lot harder on cost controls and margin improvements.

Coursera 2022 Guidance

Coursera Investor Presentation

Conclusion

We appreciate the quality of the Coursera platform and the mission the company has of bringing quality education at affordable prices around the world. We believe at some point the company should start displaying a lot more attractive economics reflecting the competitive advantages of being a dominant platform. However we believe the company also has to balance growth with cost control, and until it does we believe it shouldn’t be bought unless the share price compensates for the profitability risk. As it stands we would not be interested in buying the shares unless they got close to ~$10 per share. We would certainly be willing to pay much more if we start seeing operating leverage in future results and better expense control by the company.

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