Strategic Partnerships And EdTech Growth Propel Company To New Heights

Key Takeaways

• Strengthening of strategic corporate partnerships is expected to lead to sustained revenue growth by expanding the customer base and increasing course enrollments.
  
• Investment in Education Technology Services division aims to boost revenue through increased market share and subscriber base in online education and workforce development sectors.
  
• Strategic Education's aggressive expansion and increased investments, especially in ETS and ANZ, risk net margins amid regulatory challenges and dependence on corporate-affiliated enrollment.

Catalysts

Through its subsidiaries, provides education services through campus-based and online post-secondary education, and programs to develop job-ready skills.

• The corporate-affiliated enrollment growing at twice the rate of noncorporate enrollment indicates a strengthening of strategic corporate partnerships, likely leading to sustained revenue growth from this segment by expanding the customer base and increasing course enrollments.
  
• Investment in the Education Technology Services (ETS) division, specifically in Sophia and Workforce Edge, is expected to support accelerated growth of these platforms, boosting revenue through increased market share and subscriber base in the online education and workforce development sectors.
  
• Expansion of operating margins, particularly in the U.S. Higher Education segment due to high enrollment and revenue growth with relatively fixed operating expenses, suggesting that further revenue increases could disproportionately benefit net margins and earnings.
  
• International student enrollment growth in Australia/New Zealand, driven by both new Visa entrants and market share gains among students transferring institutions, which could impact revenue positively through increased enrollment and potentially higher revenue per student due to favorable tuition rates.
  
• The company's ongoing commitment to increasing corporate partnerships, which has led to a significant portion of U.S. Higher Education enrollment coming from these partnerships, indicates a forward-looking growth strategy that could lead to higher revenue, given the scalability of such partnerships and their potential to unlock new revenue streams.

Assumptions

• Analysts are assuming Strategic Education's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.8% today to 11.9% in 3 years time.
• Analysts expect earnings to reach $166.0 million (and earnings per share of $nan) by about November 2027, up from $117.2 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 21.9x on those 2027 earnings, up from 18.3x today. This future PE is greater than the current PE for the US Consumer Services industry at 17.8x.
• Analysts expect the number of shares outstanding to grow by 0.86% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.26%, as per the Simply Wall St company report.

Risks

• Increased investments in the second half of 2024, particularly in the Education Technology Services (ETS) and Australia/New Zealand (ANZ) segments, could elevate operating expenses, potentially compressing net margins if revenue growth does not exceed the pace of expenditure increases.
  
• The planned higher marketing spend in Australia, as part of the overall increase in operating expenses, may not yield proportional enrollment or revenue increases, risking lower returns on investment that could impact net margins negatively.
  
• Regulatory changes or challenges in obtaining student visas in Australia, as noted with the lengthening approval times, could deter international student enrollment, adversely affecting revenue growth in the ANZ segment.
  
• Dependence on corporate-affiliated enrollment for U.S. Higher Education growth introduces risk if economic downturns or strategic shifts among corporate partners reduce enrollment rates, directly impacting revenue.
  
• The shift to increase corporate partnership enrollment to potentially over 50% introduces concentration risk; reliance on a limited number of corporate partners for a significant portion of revenue could lead to volatility in earnings, should any key partnerships alter or cease.

Valuation

• The analysts have a consensus price target of $121.33 for Strategic Education 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 $135.0, and the most bearish reporting a price target of just $109.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.4 billion, earnings will come to $166.0 million, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 6.3%.
• Given the current share price of $88.1, the analyst's price target of $121.33 is 27.4% higher.
• 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.