Consumer Subscriptions And AI Will Broaden Global Reach

Key Takeaways

• Strategic consumer subscription growth and expanded partnerships aim to boost predictable revenue and gross margins through content sales and platform fees.
  
• AI transformation and enterprise penetration strategies target enhanced learning experiences and substantial revenue growth with minimal acquisition costs.
  
• Udemy faces revenue growth challenges due to macroeconomic uncertainty, subscription model changes, and organizational restructuring affecting both consumer and enterprise segments.

Catalysts

A learning company, that operates a marketplace platform for learning skills in North America, Europe, the Middle East, Africa, the Asia Pacific, and Latin America.

• Udemy is making a strategic shift towards increasing consumer subscriptions, which rose nearly 40% year-over-year in Q1. This evolution is expected to drive more predictable and high-quality recurring revenue, ultimately contributing to revenue growth and improved gross margins.
  
• The push to expand Udemy's partnership ecosystem allows for leveraging the global reach and technology infrastructure to create new revenue streams through content sales and platform fees, positively impacting revenue and gross margins.
  
• Udemy's aggressive AI-driven transformation, implementing AI capabilities into their reskilling platform, aims to enhance personalization and effectiveness of learning experiences. This is expected to significantly increase engagement and drive revenue growth by capturing the expanding market for AI skills.
  
• The company is focusing on increasing penetration with existing enterprise customers, having only addressed less than 10% of available seats, thereby offering substantial upside potential in terms of revenue growth with minimal additional customer acquisition costs.
  
• The global market activation, which includes a full-stack localization strategy, is designed to capture potential growth in high potential international markets. This initiative is expected to further drive international revenue, especially given that over 60% of current revenue comes from outside the U.S.

Udemy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Udemy's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -8.7% today to 8.3% in 3 years time.
• Analysts expect earnings to reach $75.7 million (and earnings per share of $0.48) by about May 2028, up from $-68.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $117.7 million in earnings, and the most bearish expecting $-23.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.4x on those 2028 earnings, up from -15.1x today. This future PE is greater than the current PE for the US Consumer Services industry at 20.3x.
• Analysts expect the number of shares outstanding to decline by 1.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.46%, as per the Simply Wall St company report.

Udemy Future Earnings Per Share Growth

Risks

• There is a cautious outlook on revenue due to macroeconomic uncertainty, which could hinder consumer spending and affect the revenue growth of Udemy's Consumer segment.
  
• Udemy's transition to a subscription-first model introduces pricing and packaging changes that could affect immediate cash flows, potentially impacting short-term revenues.
  
• The restructuring in 2024, particularly the reduction in SMB sales team capacity, has created pressure on top-line growth despite expected margin expansion, affecting overall earnings.
  
• Given geopolitical developments and mixed economic signals, particularly in North America and EMEA, there may be a more cautious spending environment that could affect revenue from enterprise customers.
  
• Existing customer net dollar retention is under pressure, partly due to execution issues following sales organizational changes, which could impact recurring revenue and overall earnings.

Valuation

• The analysts have a consensus price target of $9.392 for Udemy 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 $12.21, and the most bearish reporting a price target of just $6.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $911.1 million, earnings will come to $75.7 million, and it would be trading on a PE ratio of 21.4x, assuming you use a discount rate of 6.5%.
• Given the current share price of $6.98, the analyst price target of $9.39 is 25.7% 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.