The past year brought with it a monumental shift in the way many of the world’s industries function. The transition was largely digital and for most sectors, like retail, it’s likely very permanent. However when it comes to education stocks, particularly those focused on digital education, the jury’s still out.
The pandemic birthed several market darlings from the education space, but whether these impressive runs can continue remains in question. Here’s a look at three education stocks that might find themselves in detention in the near-future.
Education Stocks to Watch: Pearson (PSO)
Pearson is one of the traditional education stocks that grabbed hold of the digital revolution in online learning with both hands. On the plus side, the group had already dipped a toe in the digital learning environment with some fully digital offerings and a suite of hybrid offerings as well. But 2020 saw the group shift its focus heavily toward online. In 2017, 59% of the group’s portfolio contained a digital element. By 2020 that figure had jumped to 73%.
This isn’t necessarily a bad thing. While education may never become fully digital, it will at least become more weighted toward online. PSO stock is banking on this.
But a transition like that is costly and risky, something that’s been evident in the group’s financials over the past year.
Pearson’s managed to grow sales but profits haven’t always followed suit. The group’s massive investment in global online learning has helped keep revenue growth strong, but the question is how long that can continue. The past year has been arguably the best it’s going to be for digital learning. There’s no evidence online learners are sticky—they could head back to the classroom now that traditional alternatives are popping up again.
The bottom line with Pearson is execution. It’s certainly not a got an F, but the market may be a little too excited about its expensive digital transformation. PSO stock is changing hands for 16 times its expected earnings—well beyond its long-term average. This is probably a bit overzealous. If e-learning does take off, PSO’s one of the education stocks set to benefit, but there’s also execution risk and competition to worry about.
Chegg (CHGG)
Chegg, an online tutoring service, is a textbook example of a canary in the coal mine for education stocks. CHGG stock more than tripled as lockdowns opened the door for bored, unemployed people to sharpen their skills as investors bet on a massive shift toward digital education. However, with job prospects abundant and free time in scarce supply, Chegg’s seen its customer base dry up, which erased about half of the group’s valuation in a matter of days.
There are a few takeaways from Chegg’s predicament, which saw enrolments fall off a cliff as pandemic worries started to subside. The first is that digital education may not be the game-changer we thought it was. While more convenient, it lacks the face-to-face, hands-on experience that people—especially young people—are craving. There’s probably space for digital education to take up a larger slice of the pie, but not to disrupt the industry entirely.
The other key point to glean from CHGG stock’s fall from grace is the potential for change in higher education all together. How much is a college degree worth these days in terms of earnings power? Some suggest the value of prestigious higher education is starting to wane. This could be particularly painful for companies like Chegg that relies on University students using its products to get their degree.
Education Stocks to Watch: New Oriental (EDU)
The growing middle class in China coupled with a boom in online learning spawned a host of popular Chinese education stocks that investors were eager to snap up. New Oriental is one such firm whose tutoring services caught investors’ attention and saw shares of EDU stock rise by roughly 50% through 2020. But so far in 2021, the group’s share price is down more than 80% as concern over how Beijing will treat private education institutions was baked into its price.
The Chinese government is looking to equalize education opportunities by cutting down on the number of for-profit schools and tutoring services available. While the market won’t be completely eliminated, it will become harder to operate. This underscores one of the key risks associated with buying Chinese stocks. The government’s ability to act unilaterally means the chance of unexpected disruption is higher.
But with an 88% decline under its belt, bargain hunters understandably have their eyes on EDU stock. Sure, the group may be able to secure a special lisence to keep its tutoring open. And management’s created a safety net in the form of an online agricultural retail operation (yes, you read that right.) The link between running an e-learning platform and one that sells farm equipment is tenuous at best, so I have to believe that anyone buying New Oriental stock is doing so on hopes the company can find a way to continue serving China’s e-learning market. While this appears to be possible via special licences, the market for such services is likely to shrink considerably as the government limits access. All together, that’s enough to make New Oriental a potential falling knife.
On the date of publication, Laura Brodbeck did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Laura Brodbeck has a Finance degree from Duquesne University and has been writing about financial markets for the past 8 years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.
