AI Adoption And Digital Learning Shift Will Transform This Education Leader

Catalysts

About McGraw Hill

McGraw Hill is a global learning company that delivers AI-enhanced, data-driven education solutions across K-12, higher education and professional markets.

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

• Rapid adoption of AI-powered learning tools such as ALEKS, AI Reader, Sharpen Advantage, Writing Assistant and Teacher Assistant is deepening institutional integration and student engagement, supporting sustained digital revenue growth and expanding EBITDA margins.
• Structural shift toward subscription and Inclusive Access models, with reoccurring revenue already at 63% of total and over half of Higher Education sales via Inclusive Access, is driving higher revenue visibility, stickier relationships and improved earnings quality.
• Long-term expansion of digital learning in Higher Education, where McGraw Hill has reached 30% share and continues to gain across disciplines, is positioning the company to outgrow underlying enrollment trends and lift topline growth and operating leverage.
• Rising demand for integrated Core plus Supplemental and Intervention solutions in K-12, anchored by products like Reveal Math, ALEKS Adventure, McGraw Hill Plus and Emerge, is increasing win rates and bundling potential, supporting K-12 revenue reacceleration and stronger net margins from fiscal 2027 onward.
• Growing importance of trusted, efficacy-backed content and proprietary learner data in an AI-converging education market is reinforcing McGraw Hill’s competitive moat. This is enabling value-based pricing and a mix shift toward higher-margin digital contracts that enhance earnings growth.

Assumptions

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

• The bullish analysts are assuming McGraw Hill's revenue will grow by 4.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -5.0% today to 13.3% in 3 years time.
• The bullish analysts expect earnings to reach $318.3 million (and earnings per share of $1.75) by about December 2028, up from $-104.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $218.7 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 25.1x on those 2028 earnings, up from -31.6x today. This future PE is greater than the current PE for the US Consumer Services industry at 16.5x.
• The bullish 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 8.74%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A prolonged downturn or structural stagnation in K-12 adoption cycles, especially if California Math, Florida ELA and other large adoptions are delayed or smaller than anticipated, would undermine the expected fiscal 2027 K-12 rebound and constrain consolidated revenue growth and operating leverage, pressuring earnings.
• Intensifying competition from AI native and lower cost digital learning providers could erode McGraw Hill’s pricing power and Inclusive Access share gains, weakening value-based pricing realization and slowing the mix shift toward higher margin digital subscriptions, which would cap net margin expansion and earnings growth.
• An eventual slowdown or reversal in Higher Education enrollment, particularly at community colleges where McGraw Hill over-indexes, combined with the demographic cliff narrative, could offset share gains and TAM expansion from new products, reducing the sustainability of double digit Higher Education growth and limiting consolidated revenue and EBITDA momentum.
• Rising AI compute, data storage and infrastructure costs, if they outpace the savings from internal AI productivity tools like Scribe, could dilute the anticipated AI driven operating efficiencies and turn AI into a structural cost headwind, compressing gross margins and limiting future EBITDA margin expansion.
• Persistent weakness or volatility in International markets such as Spain and Canada, where recent trends already show declines tied to cyclical K-12 adoption and enrollment normalization, could signal that McGraw Hill’s model is less resilient outside the U.S., dragging on consolidated revenue growth and reducing diversification benefits for earnings.

Valuation

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

• The assumed bullish price target for McGraw Hill is $26.54, which represents up to two standard deviations above the consensus price target of $21.0. This valuation is based on what can be assumed as the expectations of McGraw Hill's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $27.0, and the most bearish reporting a price target of just $16.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $2.4 billion, earnings will come to $318.3 million, and it would be trading on a PE ratio of 25.1x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $17.2, the analyst price target of $26.54 is 35.2% 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.