Rumors Circulate that BYJU’S May Bid to Acquire a Smaller E-Learning Firm to Gain a Foothold in the U.S.

An axiom among stock market investors is that the market’s trading patterns eventually cause the maximum pain for the maximum number of investors. An example supporting this point may be the recent behavior of stocks in the online education sector.

The conventional thinking is that consumers may now consider online education and tutoring to be among the most discretionary of all expenses as inflationary pressures build and the economy begins to slow. Either prospective students will decide not to spend on such services as they scrutinize monthly spending priorities, or they may attempt to find extra work to offset rising prices for goods and services. As a result, edtech stocks were to be assiduously avoided.

However, various media outlets, including in India, are reporting that BYJU’S, a private India-based company which is acknowledged as the world’s leading e-learning company, may bid to acquire 2U, Inc. (NASDAQ: TWOU) or perhaps Chegg, Inc. (NYSE: CHGG) to expand into the U.S. market. Indeed, one report says that BYJU’S made a US$15 per share takeover offer to 2U’s Board sometime during the June 20-24 trading week. Furthermore, some sources indicate that BYJU’S has secured US$2.4 billion of debt financing for whichever deal it chooses.

The surprising aspect of all this speculation is that BYJU’S, which was most recently valued at about US$22 billion and has about 7 million paying subscribers, is experiencing a significant dip in demand for its services. It may be cutting as many as 2,500 employees in its legacy operations in India. The reopening of schools and colleges in that country is impacting even the strongest edtech company.

Shares of 2U, Inc. have soared since the rumors began to circulate, reaching US$12.25 per share at the close on July 1, up 32% in three days. By comparison, Chegg has moved up only modestly, advancing 4% over that same period. Another well-known e-learning firm, Coursera, Inc. (NYSE: COUR), has declined about 1.5% over this span.

Note that all three of these U.S.-traded online education stocks performed abysmally over the first half of 2022. Shares of 2U, Chegg and Coursera have declined 39%, 38% and 40%, respectively, since December 31, 2021.

Despite these corrections and challenging fundamentals, all of these stocks continue to trade at fairly robust valuations, not at the heavily discounted metrics one may have expected after marked first-half price declines.

(in thousands of US $, except where noted)Chegg, Inc.Coursera, Inc.2U, Inc.
Stock Price$19.70$14.58$12.25
Shares Outstanding (Millions)125.89144.0577.07
Stock Market Capitalization$2,480,033$2,100,249$944,108
Adjusted EBITDA$227,500($45,500-$51,500)$85,000
Enterprise Value (EV)$2,988,861$1,338,168$1,765,401
EV/Adjusted EBITDA13.1N/M20.8
Balance sheet data from 3/31/22.  Income/cash flow statement projection from midpoint of current full-year 2022 company guidance.

Chegg still trades at a rich enterprise value-to-projected adjusted EBITDA level of about 13x. The cash flow multiple of 2U is even higher, at 21x. Coursera expects to post an EBITDA loss of around US$50 million this year, so a ratio cannot be computed.

If BYJU’S does make a bid for one of these stocks, the e-learning group may rally. However, the valuations would not seem to support a sustained advance.

Information for this briefing was found via Edgar and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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