John Major is a long-forgotten British Prime Minister. Next month marks the 25th anniversary of his resignation. That date is unlikely to lead to tears.
However, Major’s legacy will linger for a different reason. Major left school at 16. He applied for a job as a bus conductor. As an earnest and reliable youth, he satisfied most of the criteria for the job. But he failed the arithmetic exam.
Major’s inability to count did not hinder his career. He eventually got a job as bank clerk at Standard Bank. He rose steadily and surely. Eventually, he became a bank manager in Nigeria.
Major then entered politics. He benefitted from the in-fighting among the Tories. In a short space of time, the failed bus conductor become Prime Minister. His mathematical skill was a topic of discussion in his time in office. Many experts lamented the standard of teaching.
In Major’s youth, formal education was the only route. Today, there are many alternatives to formal education. Children who have trouble counting have other options.
Education technology (edtech) bridges the gap. For example, Chegg, a US-listed edtech company, has an app to help with homework. One can send a handwritten maths problem through the app. Step-by-step answers are then zapped back. Edtech caters to children and adults. Both students and workers use it.
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The use of technology in education has exploded due to Covid. The lockdown has closed many schools. It led to a search to a surge in online teaching. Hybrid teaching led to a boom in use of edtech options.
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Chegg is one such company. It traces its routes to an Iowa State University message board. The message board was used for finding internships. The name Chegg is a combination of chicken and egg.
In 2008, Chegg then realised that iPhone could propel education. It released apps like the one that helps children with homework. By subscribing to the Chegg app, users can get a range of educational aids. For instance, students can get answers to up to 67 million questions on its database.
Chegg’s user base has skyrocketed with Covid. It has 100 million users, including thousands in Singapore. Its revenue growth jumped 57% in 2020. It was almost as high in 2021.
The reopening after the Covid lockdown has not diluted Chegg’s ascent. In 4Q2021, its revenue was on a par with 4Q2020 which was the peak of the pandemic.
Chegg has lost 70% of its value in the last year. The global sell-off in edtech has taken its toll. However, the company’s outlook seems ever brighter.
According to consensus, Chegg is on track to generate US$250 million ($346 million) in free cash flow (FCF) in FY2022. This would rise to US$300 million in FY2023. The subscriber model in education seems to be a cash cow. Platforms like Chegg are scalable and have a high proportion of fixed costs.
Other edtech opportunities are thriving in the reopening. 2U works with universities to put short course material online. Users can take short courses on marketable topics. For example, 2U offers courses on inventory accounting programming, which is a practical skill. It’s a pity that it was not around in Major’s era.
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2U offers practicality with legitimacy. The courses are tailored for the job market. It also carries the validation of leading universities like Yale. It also has a completely online degree option.
Like Chegg, 2U has been hammered in the edtech rout. Its market cap stands at US$803 million, having lost 73% of its value in the last year. The consensus expects it to be ebitda-profitable by this year. It could generate US$65 million in FCF in FY25. A three-year FCF yield of 7% is decent value, when revenue growth is 22%.
The two stocks, Chegg and 2U, are poster children for edtech’s potential. However, there are risks in education investing. It is a business that is vulnerable to accounting fraud. The payments are upfront, creating an incentive to exaggerate users. Raffles Education’s travails are an example.
Poor education is not a hurdle, as Major’s ascent shows. But his success is the exception, not the rule. The demand for edtech in Covid is a lesson. There is craving for education from the bus conductor to the Prime Minister.
Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column
