- Digital education company Nerdy is going public via a merger with TPG Pace Tech Opportunities
- Demand for remote education accelerated during COVID lockdown, will continue to grow
- Nerdy is priced at a steep discount to peers Chegg, Inc., Fiverr International Ltd.
- Nerdy’s revenue expected to grow 31% in 2021, 43% in 2022
- Clear path to profits with positive Ebitda in 2023
- Several avenues for additional growth with new courses, international expansion
- Backed by white shoe VC firm TCV, Chan Zuckerberg Initiative
From A-Rod’s next grand slam to Richard Branson’s rocket ships, there are plenty of moonshot investments in the public markets to go around. But savvy investors are better off simply hitting the books.
It’s time to study Nerdy, a fast-growing digital learning company that will go public after merging with TPG Pace Tech Opportunities (NYSE: PACE), a special purpose acquisition company or SPAC that raised money to find a target. Investors who buy PACE shares now will see them automatically convert to Nerdy shares once the deal closes.
It’s important to appreciate the growth in digital learning that has increased ahead of schedule as a result of COVID lockdowns around the world. Remote technologies were growing apace even before the pandemic and consumers have embraced the convenience of learning anytime, anywhere, and with the instructors of their choice.
In consequence, digital learning is expected to penetrate overall education at a far faster pace than e-commerce encroached on brick and mortar. While it took 15 years for e-commerce to grow to 11% penetration from 2%, digital learning should only take seven years, according to Michael Moe, Founder of Global Silicon Valley.
Investors are clearly taking notice. Shares of Chegg, Inc., which focuses on university and high school textbooks along with homework help, have nearly tripled in the last year. The latest surge came after a blowout fourth-quarter – reported just this week.
But while the real money may have already been made in Chegg, Nerdy presents an opportunity to invest early. The company, which was started by Chuck Cohn, Founder, Chairman and Chief Executive Officer, has trailblazed through an old industry ripe for change – but has heretofore been unknown to many investors.
Nerdy is a a direct-to-consumer offering that helps both students seeking knowledge and teachers who want full or part-time gigs. Unlike others in the education field, Nerdy reaches students of all ages, covering over 3,000 subjects. That makes it possible to introduce new content and hang onto users even as they graduate from middle school or even college.
The rates are reasonable – even free for many courses. But once learners join, they often join jump into classes. They can branch out into one-on-one sessions, large groups, or small groups that allow for interaction. It’s much like a real-life college experience attending a lecture, preceptorial, and office hours with the professor.
Put another way, Nerdy is a combination of Chegg and Fiverr, a two-sided marketplace where buyers and sellers exchange all manner of services such as writing and design work. That model makes a lot of sense for people who work at home for part or all of the day and want to generate extra income.
Nerdy also employs AI to help match students with the best teachers and classes. The system asks new students to complete questionnaires, creating data regarding personality type (introvert or extrovert, for instance), interests, and aptitude – all of which help optimize course and instructor selection. The AI works: Nerdy boasts an NPS score of 68, which is on par with Netflix and other successful media platforms.
Importantly, Nerdy’s revenue streams are diversified, which can help in the event of economic shifts. Nerdy covers the lifecycle of learning opportunities, including academic tutoring, test preparation, professional certifications and other educational needs.
There is plenty of opportunity to grow faster. Nerdy has wisely discovered the power of celebrity instructors – much like Peloton – who command massive audiences. Its StarCourses have pulled in hundreds of thousands of extra learners because of their hotshot instructors. Nerdy can also continue to add new material like professional certifications or pursue targeted M&A.
Of all growth possibilities, investors should think hard about international expansion. Unlike other media companies such as Netflix that need international distribution rights, Nerdy can likely offer material overseas without such headaches. That literally creates a world of opportunity.
When it comes to growth, investors need to look carefully at 2020 before jumping to rash conclusions. While overall growth might appear soft at 16%, there were many moving pieces such as the closure of in-person locations. The real number to look at: a whopping 87% growth in online revenue in the fourth quarter.
The bottom line is also shaping up. The company commanded a 68% gross margin in the fourth quarter, and other profit measures are equally promising. Ebitda margins continue to improve, indicating a clear path to profitability by 2023.
The company expects to grow 31% in 2021 and 43% in 2022. That’s not only faster than Chegg and Fiverr, but also consensus estimates for other marketplaces like Airbnb, DoorDash and Etsy.
That makes the stock look like a wise bet. Nerdy, at the current share price of $11.70, trades at 8.6 times 2022 sales. By comparison, both Teledoc Health, Inc. and Chegg trade at 16 times, according to Sentieo, an AI-enabled research platform. Fiverr, meanwhile, trades at multiple of 31 times.
Last but not least, Nerdy is backed by some of the most impressive figures in the Valley. One major investor to note is TCV, which has invested billions in technology companies and shepherded the likes of Airbnb, Inc., Spotify, and Peloton into public life. TCV General Partner Woody Marshall, known for his investment acumen, is on the board of directors.
At the moment and current share price, investors have a rare opportunity to learn from Mr. Marshall and others who spotted Nerdy early. The varsity move for astute investors is to get in now.
John Jannarone, Editor-in-Chief