Subscription Headwinds And AI Reskilling Challenges Will Eventually Strengthen Long Term Earnings Potential

Catalysts

About Udemy

Udemy operates a global online learning platform that serves both enterprises and individual learners with skills based courses and subscriptions.

What are the underlying business or industry changes driving this perspective?

• Although the shift to subscriptions is building a larger base of recurring revenue that management expects to grow in the high single digits for 2025 and closer to double digits in 2026, the move away from transactional course sales is creating a short term drag on Consumer segment revenue and could weigh on consolidated revenue growth and earnings if subscriber uptake slows.
• While enterprises appear to be investing heavily in AI related workforce reskilling, Udemy Business is still working through COVID era contract downsizing and a go to market reset. Any delay in converting the robust AI upskilling pipeline into expansion deals could limit net new ARR and keep net dollar retention near the low 90% area, which would cap revenue leverage and margin improvement.
• Although management highlights strong early unit economics in Consumer subscriptions with lifetime value to customer acquisition cost well above 3x, accelerating the pivot involves intentionally reducing transactional course volume and deferring more revenue into future periods. This could restrain near term reported revenue and free cash flow growth despite a healthier long term model.
• While demand for continuous upskilling and professional certification appears broad, with examples like CompTIA journeys showing roughly 4x higher average revenue per learner, scaling these outcome based offerings depends on deep integrations with partners such as Pearson and certification bodies. Execution risks around content, exams and pricing could limit the uplift in revenue and net margins.
• Although hundreds of enterprise customers are experimenting with AI Role Plays and other AI tools tied to sales enablement and customer support, Udemy plans to introduce tiered monetization and stand alone offers over time. If customers are slow to accept new pricing models or limit usage, the contribution to ARR growth and earnings from these AI heavy products could be smaller than implied by current adoption levels.

Assumptions

This narrative explores a more pessimistic perspective on Udemy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Udemy's revenue will grow by 3.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.5% today to 10.4% in 3 years time.
• The bearish analysts expect earnings to reach $91.9 million (and earnings per share of $0.57) by about January 2029, up from $-3.7 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $111.4 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.3x on those 2029 earnings, up from -224.0x today. This future PE is lower than the current PE for the US Consumer Services industry at 17.1x.
• The bearish analysts expect the number of shares outstanding to decline by 0.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.09%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The long term shift from one off course purchases to subscriptions is currently creating a short term headwind in the Consumer segment, and management expects Consumer revenue to decline about 9% for 2025. If subscription growth slows or subscriber churn increases, total revenue and free cash flow could be weaker than you are assuming.
• Udemy Business net dollar retention is 93% overall and 97% for large customers, and management is still working through downsizing of COVID era contracts and a reset of the go to market model. If those renewals remain pressured or expansion within existing customers stalls, net new ARR and earnings could fall short of expectations.
• The company is leaning heavily into AI products such as Role Plays and personalized learning paths and plans to introduce tiered monetization and stand alone offers. If enterprises do not adopt these tools at the usage levels or price points Udemy is planning, the expected uplift in ARR, gross margin and net margins may not materialize.
• Consumer subscriptions currently have a lifetime value to customer acquisition cost well above 3x, but Udemy is also experimenting with advertising and sponsorships across a global audience in 170 countries. If ad based models dilute the user experience, reduce course completion or make the platform less attractive for high quality instructors, that could weigh on long term revenue growth and margin expansion.
• The long term thesis relies on being an essential partner in AI driven reskilling with nearly 60% of global professionals needing new skills by 2030, yet Udemy faces consolidation against other learning vendors and pressure on learning and development budgets. If competitors capture a larger share of these enterprise reskilling programs, Udemy could see slower ARR growth and less improvement in earnings than you expect.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Udemy is $7.0, which represents up to two standard deviations below the consensus price target of $8.51. This valuation is based on what can be assumed as the expectations of Udemy's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $10.56, and the most bearish reporting a price target of just $7.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $884.9 million, earnings will come to $91.9 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $5.78, the analyst price target of $7.0 is 17.4% 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.