Chegg and K12 are making waves in the education sector this year, but which one represents the best long-term bet as well as being a temporary safe-haven?
Aug. 17, 2020
COVID-19 has changed all of our lives, and education has been amongst the most affected sectors. With schools shut and third-level institutions operating on a distance-learning basis, there is a great deal of uncertainty about schooling. Much of the country has turned to home-schooling and online resources, a massive boon for both of these companies, but can this last once a vaccine is developed?
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State of play
Chegg (NYSE: CHGG) is a provider of textbook rentals, both in digital and physical formats, as well as online tutoring and other online services for students. In terms of opportunities, the COVID-19 pandemic has helped it solidify its place on the marketplace, becoming a household name in the education sector. It has become an authority for students looking for online resources at this difficult time.
Likewise, K12 (NYSE: LRN) has capitalized on the impact of the COVID-19 pandemic. As a provider of homeschooling resources including curricula and other materials distributed digitally, it has been the subject of much interest in the sector. In the five months from March 6 to August 6 2020, its share price increased 140.78% to $49.36 a share; price being the best metric of investor interest.
K12’s stock seems like a hot option given the extent to which it has increased its share prices, but a look at its results for the 2020 fiscal year reveals that it posted revenues of $1.04 billion, only a very modest increase compared to revenues of $1.015 billion for the 2019 fiscal year. However, in terms of traffic, the K12.com website saw one million unique visitors in February and March of this year, a 49% increase year-on-year. This kind of traffic is bound to deepen brand recognition and equity. As the COVID-19 pandemic drags on into Fall, K12 itself seems bullish about the future, announcing plans to hire over 1,300 educators for the 2020-2021 academic year.
On the other hand, the COVID-19 crisis has seen a significant increase in Chegg’s business as well as its stock price. Posting hefty Q2 2020 returns of $126 million, a 57% increase in year-over-year terms, it beat even the most ambitious estimates and goals. In addition to this, Chegg has already proven itself well-able to adapt to circumstances, capitalizing on challenging situations that would cripple other companies. Its original core business was in textbook rental, a logistics-heavy activity with limited returns. Their current subscription-based model readily lends itself to scaling and digital distribution, making it much more potentially profitable, as has been reflected in their returns so far this year, making a company which has so far struggled to reach profitability a much more attractive offering for investors. With a total addressable market (TAM) of 54 million students, amongst which it enjoys 87% brand recognition, there remains a lot of space yet for Chegg to grow.
Bears out there
One of the main challenges that Chegg faces is its fast turnover. The majority of students in U.S. colleges spend just three or four years in third-level education, meaning that its brand equity may not prove to be as perennial as other companies in education, such as universities themselves. Historically the company has struggled with profitability, although its pivot away from its logistical-heavy book rental service to intermediary rental services and other online services has done a lot to turn this around.
The biggest risk to K12’s growth will be the end of the pandemic. People will need to get back to work, and children back to school. Before the pandemic, only some 3.4% of children were homeschooled, and although the change of culture that COVID-19 certainly heralds will be far-reaching, it is hard to imagine this figure going far beyond that as restrictions are inevitably eased and parents return to work.
It may be that K12 will stay in line with these very respectable earnings over the long term, entrenching itself in the homeschool market for years to come. This is a very specific section of the education sector, with its own very specific set of values and community resources.
On the other hand, Chegg will have to fight to capture the attention of every year of incoming freshmen undergrads, who are a notoriously flighty and volatile consumer group. It could be a great place for your money during the pandemic, but K12 might be a safer long-term bet, especially if it sees a readjustment of their share price.
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