AI Integration And AWS Partnership Will Transform Future Of Education

Key Takeaways

• Partnership with AWS and AI integration will enhance learning experiences, operational efficiency, and support revenue and margin growth.
  
• Expansion into international markets and virtual learning improvements are key drivers for capturing growth in fast-growing education segments.
  
• Leadership changes and geopolitical factors threaten revenue stability, while U.S.-centric operations and competitive pressures could limit growth in English Language Learning and assessment markets.

Catalysts

Offers educational courseware, assessments, and services in the United Kingdom, the United States, Canada, the Asia Pacific, other European countries, and internationally.

• The partnership with AWS is expected to accelerate Pearson's technological transformation, particularly in higher education, virtual learning, and English language learning. This partnership should enhance the learner experience and drive mid-single-digit revenue growth.
  
• Pearson is leveraging AI across its products and services to enhance efficiency and innovation. This initiative is expected to improve product development speed and cost efficiencies, which should contribute to improved net margins.
  
• Virtual Learning is anticipated to return to growth through enrollment increases and operational improvements, including a new portal that halves enrollment times, which should drive revenue growth.
  
• Expansion into international markets and direct sales into the U.S. K-12 channel for Higher Education offerings are expected to capture value from fast-growing segments, supporting revenue growth.
  
• The ongoing focus on operational efficiencies, exemplified by the company's execution synergies and software product development life cycle improvements, is likely to support sustained margin improvement and earnings growth.

Pearson Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pearson's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.2% today to 12.1% in 3 years time.
• Analysts expect earnings to reach £490.5 million (and earnings per share of £0.75) by about March 2028, up from £434.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.2x on those 2028 earnings, up from 20.8x today. This future PE is lower than the current PE for the US Consumer Services industry at 28.6x.
• Analysts expect the number of shares outstanding to decline by 2.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.28%, as per the Simply Wall St company report.

Pearson Future Earnings Per Share Growth

Risks

• The departure of a key leader, Gio Giovannelli, who contributed significantly to driving revenue and profit growth in the English Language Learning business, might impact the continuity in leadership and strategy, potentially affecting revenue stability and growth.
  
• While partnerships with AWS and Microsoft are promising, executing on these large-scale projects can carry significant risks, such as delays or technical challenges, which can impact operational costs and future revenue streams.
  
• The expected moderation in the growth of English Language Learning, particularly due to geopolitical factors like elections affecting immigration rates, could impact revenue growth in that segment.
  
• The heavy reliance on U.S.-centric business operations, with changes in federal and state education policies and political administration, could lead to variability in revenue streams and growth prospects.
  
• Potential volume pressures and competitive dynamics in the U.S. student assessment market and VUE could result in lower-than-expected contract wins or renewals, influencing revenue predictions.

Valuation

• The analysts have a consensus price target of £13.554 for Pearson based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £16.2, and the most bearish reporting a price target of just £11.97.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £4.1 billion, earnings will come to £490.5 million, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of £13.62, the analyst price target of £13.55 is 0.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.