AI Upskilling Demand And Employer Partnerships Will Drive Long-Term Earnings Power

Catalysts

About Phoenix Education Partners

Phoenix Education Partners, through the University of Phoenix, provides flexible, career focused higher education and credentialing for working adults.

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

• Rising employer demand for upskilling and retention partnerships is expanding B2B enrollment channels, which is expected to support sustained degree enrollment growth and higher quality revenue over time.
• The accelerating pace of workforce skills obsolescence is increasing demand for career aligned degrees, certificates and microcredentials. This is positioning the university to deepen share of wallet with existing students and support long term revenue growth.
• Scaled deployment of AI and automation across marketing, enrollment and student support is improving lead conversion and operating efficiency, which is expected to translate into better net margins and earnings leverage as enrollment grows.
• Robust regulatory footing, including long dated Title IV recertification and recent program accreditations, reduces compliance overhang and supports stable access to federal aid. This underpins visibility and durability of revenue and cash flow.
• A cloud based, data rich platform with ample capacity to add students without major incremental investment allows future enrollment gains to flow through at attractive incremental margins, supporting EBITDA and net income growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Phoenix Education Partners's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.3% today to 18.0% in 3 years time.
• Analysts expect earnings to reach $202.2 million (and earnings per share of $5.16) by about December 2028, up from $133.9 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 12.3x on those 2028 earnings, up from 9.2x today. This future PE is lower than the current PE for the US Consumer Services industry at 16.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.21%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Heightened regulatory scrutiny around federal financial aid, outcomes based earnings thresholds and the One Big Beautiful Bill reforms could restrict access to Title IV funding for certain programs over time, which would pressure enrollment, net revenue growth and ultimately earnings.
• If the Department of Education or Phoenix Education Partners fails to fully contain unusual enrollment and identity fraud activity across FAFSA and online programs, additional verification frictions or funding clawbacks could emerge, dampening demand, increasing compliance and processing costs and compressing net margins.
• A slowdown in employer sponsored upskilling budgets or increased competition from alternative online and corporate learning providers could reduce the growth of B2B enrollments that management is counting on, limiting future revenue expansion and EBITDA growth.
• Overreliance on AI, automation and data driven enrollment systems could create operational or reputational risks if algorithms mis-target students, raise concerns about fairness or trigger new compliance requirements, which would raise instructional and support expenses and weigh on net income.

Valuation

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

• The analysts have a consensus price target of $46.12 for Phoenix Education Partners 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 $60.0, and the most bearish reporting a price target of just $36.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $202.2 million, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $34.49, the analyst price target of $46.12 is 25.2% 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.