The education sector is critical for long-term economic growth, productivity and innovation. The sector is also less sensitive to economic fluctuations, though. And with uncertain global economic conditions, it therefore makes sense to consider exposure to education stocks.
As focus shifts to online education after the novel coronavirus pandemic, there are several attractive opportunities in this segment.
According to Paul Reville, a former secretary of education for Massachusetts:
“I’m hoping that we can learn some things through this crisis about online delivery of not only instruction, but an array of opportunities for learning and support. In this way, we can make the most of the crisis to help redesign better systems of education and child development.”
Clearly, online education can be bigger in the coming days.
With all of that in mind, I will discuss four education stocks that are attractive long-term investments. They are:
- Chegg (NYSE:CHGG)
- K12 Inc (NYSE:LRN)
- Arco Platform Limited (NASDAQ:ARCE)
- New Oriental Education and Technology (NYSE:EDU)
That said, let’s dive in to these education stocks to buy.
Education Stocks to Buy: Chegg (CHGG)
With the novel coronavirus pandemic, there is bigger focus on online learning. That said, Chegg stands to benefit as a provider of “student-first interconnected learning platform.”
For the first quarter of 2020, the company reported total revenue of $131.6 million, which was higher by 35% on a year-over-year basis.
For the same period, the company reported robust subscriber growth. From the perspective of total addressable market, Chegg reported 3.9 million subscribers for fiscal year 2019. And with international expansion, the company expects a potential market of 54 million students. In turn, this will help in triggering sustained top-line growth. And as cash flows also increase, CHGG stock is likely to trend higher.
Recently, Chegg acquired math solver Mathway — one of the highest rated educational mobile application — for a consideration of $100 million. Acquisitions can trigger higher earnings growth in the coming years, and Chegg has been active on the inorganic growth front.
Overall, Chegg has a business that delivers high gross margins. As the subscriber base continues to expand in the coming years, there is ample scope for shareholder value creation. In the last 12 months, CHGG stock has moved higher by nearly 60% — and I believe that this positive momentum is likely to sustain.
K12 Inc. (LRN)
K12 already has an established presence in the online education industry. And with a diversified range of learning offerings, the company has a significant addressable market. The company’s solutions include K-12 learning, adult career development and enterprise workforce solutions.
Moreover, the first reason to like LRN stock is the company’s likely earnings growth trajectory. In fact, for the next five years, earnings growth on an annual basis is likely at 15%.
Additionally, on average, the company is currently generating $65 million in free cash flows. And as free cash flows swell in the coming years, the LRN stock will trend higher.
Another reason to be bullish on K12 is the company’s strong balance sheet, which allows scope for inorganic growth. In January 2020, the company acquired Galvanize, “a leader in developing talent and capabilities for individuals and corporations in technical fields….”
The acquisition price tag was $165 million, and the company states inorganic growth opportunities among the focus areas in their recent presentation. That said, further acquisitions can accelerate the company’s earnings growth outlook.
Also, K12 set up a new leadership team in April 2020. The objective is to drive innovation, enhance customer experience and execute merger opportunities. And if the new team is able to meet its objectives in the coming years, LRN stock is likely to trend higher.
Arco Platform Limited (ARCE)
For investors seeking high growth companies, ARCE stock is worth considering. With a focus on Brazil, the company serves more than 1.3 million students and 5,400 private schools.
Talking about the company’s growth trajectory, Arco Platform reported top-line growth of 123% in Q1 2020 as compared to Q1 2019. And with the spread of COVID-19, online learning has been accelerating and this puts Arco Platform in a sweet spot. The company is providing content, methodology, services and technology to help schools provide the best learning experience to students.
Coming back to the growth trajectory, for the coming year, earnings growth is expected at 15%. For FY2021, analysts expect earnings growth at 34.8%. So clearly, with a robust growth outlook, ARCE stock is attractive.
New Oriental Education and Technology (EDU)
As one of the leading providers of private education service in China, EDU stock is attractive for the long-term. While the COVID-19 outbreak has impacted the company’s growth in the near-term, earnings growth is likely to be robust in the coming years.
It’s worth noting that as of February 2020, the company reported 1,416 schools and learning centers. And in the past year, the company added 252 learning centers. This is an indication of the growth trajectory.
Moreover, as the company’s penetration in China increases, top-line and earnings growth will increase on a sustained basis. At the same time, the company has an annualized operating cash flow of $160 million. So as cash flows swell, EDU stock will trend higher.
Another important point to note is that the coronavirus pandemic has triggered demand for online teaching. The company is working towards advanced training program for teachers to boost online learning. This is likely to help in accelerating growth, and makes EDU stock one to boost your portfolio’s IQ.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.