AI And Digital Education Will Drive Future Opportunities

Key Takeaways

• AI-driven products, digitalization, and strategic partnerships are strengthening Pearson's market position, supporting higher margins and future growth opportunities in education.
  
• Growing demand for upskilling and digital credentials is expanding Pearson's addressable market, driving diversification and resilience in earnings.
  
• Revenue growth and profit margins are threatened by FX volatility, contracting customer bases, contract-dependence, regulatory uncertainty, and competition from innovative edtech providers.

Catalysts

Provides educational courseware, assessments, and services in the United Kingdom, the United States, Canada, the Asia Pacific, other European countries, and internationally.

• The rapid acceleration of AI and digital transformation in education is enabling Pearson to launch advanced AI-driven study and assessment tools, cut content localization time-to-market, and streamline customer service, directly supporting higher digital revenue growth and net margin expansion.
  
• The rising global demand for upskilling, workforce certifications, and lifelong learning is increasing Pearson's addressable market in both B2B and direct-to-consumer segments, particularly through its Enterprise Learning & Skills and Early Careers initiatives, which should drive top-line growth and earnings diversification.
  
• Recent operational improvements (such as the overhaul of revenue operations, organizational streamlining, and the shift to data-driven performance management) are positioning Pearson for greater scalability, improved sales execution, and cost efficiencies, enhancing margins and long-term earnings reliability.
  
• Strategic partnerships with major technology providers (Microsoft, AWS, Google Cloud, Meta) and the acquisition of eDynamic Learning expand Pearson's reach into faster-growing adjacencies (like immersive and career/technical education), supporting future revenue and margin growth via new product/channel synergies.
  
• As demographic shifts increase the global middle class and as institutions and employers place greater value on recognized digital credentials, Pearson's leadership in assessments and qualifications positions it to capture growth from both international markets and the shift toward hybrid, skills-based education-bolstering revenue and long-term earnings potential.

Pearson Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pearson's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.5% today to 11.3% in 3 years time.
• Analysts expect earnings to reach £460.1 million (and earnings per share of £0.74) by about September 2028, up from £441.0 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 21.8x on those 2028 earnings, up from 15.3x today. This future PE is greater than the current PE for the US Consumer Services industry at 14.0x.
• Analysts expect the number of shares outstanding to decline by 0.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.63%, as per the Simply Wall St company report.

Pearson Future Earnings Per Share Growth

Risks

• Ongoing FX headwinds and international exposure-particularly with significant U.S. dollar movement against the pound-continue to negatively impact profits and adjusted earnings per share, introducing earnings volatility and creating difficulty in delivering reliable free cash flow over the long term.
  
• The declining sales and future outlook in segments like Virtual Schools and institutional English Language Learning, paired with only flattish enrollment forecasts in key Higher Ed markets, expose Pearson to risks associated with shrinking traditional customer bases due to demographic changes, lowering potential long-term revenue growth.
  
• Persistent reliance on contract-based businesses (e.g., Pearson VUE) brings execution risks, as evidenced by pauses and delays in key contracts which can materially affect revenue timing and growth; this highlights exposure to customer-specific disruptions that may undermine predictable earnings and margin stability.
  
• Pearson's transformation to digital and AI-driven offerings, while progressing, still faces the risk of lagging behind faster, more innovative edtech competitors and open-source platforms, threatening market share, future revenue, and net margins if competitive advantage erodes.
  
• Increased exposure to regulatory and budgetary shifts-such as government funding uncertainties (notably PDRI and government contract delays), as well as new education models and credentialing promoted by policy-could undermine demand for Pearson's traditional and emerging offerings, creating structural risks to revenue streams and profit margins.

Valuation

• The analysts have a consensus price target of £12.688 for Pearson 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 £14.9, and the most bearish reporting a price target of just £11.2.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £4.1 billion, earnings will come to £460.1 million, and it would be trading on a PE ratio of 21.8x, assuming you use a discount rate of 7.6%.
• Given the current share price of £10.47, the analyst price target of £12.69 is 17.5% 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.