Tutor Copilot Will Streamline Tutor Sessions

Key Takeaways

• AI-driven enhancements and dynamic pricing strategies are expected to boost engagement, retention, and ARPU, contributing to improved margins and revenue growth.
  
• Increased operational efficiency from AI tools and institutional expansion aims to enhance tutor productivity and institutional adoption, likely improving profitability and unit economics.
  
• Declining revenue, eroding margins, and uncertain institutional funding challenge Nerdy's profitability despite investments in AI and technology.

Catalysts

Operates platform for live online learning in the United States.

• AI-driven enhancements, such as personalized lessons, session summaries, and predictive analytics, are expected to significantly enhance student engagement and retention, likely driving future revenue growth as well as improving net margins through operational efficiency.
  
• The introduction of AI products like Tutor Copilot is anticipated to reduce preparation time for tutors, resulting in higher session quality and tutor productivity. This increase in operational efficiency should positively impact net margins and profitability over time.
  
• With dynamic pricing strategies, such as the recent 20% price increase, Nerdy aims to reflect the elevated value provided by the platform enhancements, which is expected to increase ARPU and contribute to sequential revenue growth.
  
• The company's strategic focus on expanding its institutional offerings with AI-enhanced products could result in increased adoption and higher retention rates within school districts, potentially driving revenue growth and improved unit economics in the institutional segment.
  
• AI-led operational efficiencies and automation are expected to enable Nerdy to maintain or reduce headcount without negatively impacting service delivery, likely leading to improved operating leverage and an accelerated path towards positive EBITDA and cash flow.

Nerdy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nerdy's revenue will grow by 10.0% annually over the next 3 years.
• Analysts are not forecasting that Nerdy will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Nerdy's profit margin will increase from -24.8% to the average US Consumer Services industry of 11.6% in 3 years.
• If Nerdy's profit margin were to converge on the industry average, you could expect earnings to reach $28.4 million (and earnings per share of $0.13) by about August 2028, up from $-45.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.3x on those 2028 earnings, up from -3.9x today. This future PE is greater than the current PE for the US Consumer Services industry at 17.9x.
• Analysts expect the number of shares outstanding to grow by 6.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

Nerdy Future Earnings Per Share Growth

Risks

• Revenue declined by 13% year-over-year in Q4 2024, primarily due to lower institutional revenue and a decrease in active members and average revenue per member (ARPM) in the consumer business. This indicates potential issues with maintaining a steady revenue stream across both segments. [Revenue]
  
• Gross margin decreased from 71.3% in Q4 2023 to 66.6% in Q4 2024, attributed to lower ARPU and higher session utilization. This decrease could signal challenges in cost management or pricing strategies impacting profitability. [Net Margins]
  
• Non-GAAP adjusted EBITDA showed a loss of $5.5 million compared to a gain of $3 million in the same period in 2023, reflecting increased costs and investments that are not yet paying off in terms of profitability. [Earnings]
  
• Institutional revenue faces uncertainty due to unpredictable government funding environments. The pressure on institutional revenues may continue until this issue is resolved, affecting the overall financial outlook. [Revenue]
  
• Despite investments in AI and technology, significant operational improvements necessary to offset higher costs, such as expert incentives, have not yet resulted in profitability. This indicates a risk in achieving the planned return to positive cash flow and EBITDA. [Net Margins]

Valuation

• The analysts have a consensus price target of $2.125 for Nerdy 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 $3.0, and the most bearish reporting a price target of just $1.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $245.1 million, earnings will come to $28.4 million, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 7.1%.
• Given the current share price of $1.5, the analyst price target of $2.12 is 29.4% 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.