Today we have a very speculative idea: take shares of online education platform Instructure (NYSE: INST), to capitalize on the rebound of its shares after a strong fall.
Growth potential and validity: 18% during 14 Months; 33% behind 3 of the year.
Why stocks can go up: they fell hard, but the hype in this promising area will help stocks rise.
How do we act: take now 21,07 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
The company has recently been listed on the stock exchange since the summer of 2021. Therefore, the main source of information about her for us will be her registration prospectus..
Instructure is an online platform for education and learning management. Here is what is included in the main functions of the platform:
- Tools for creating and managing educational content, including video platform.
- Marketplace for Online Courses.
- A set of solutions for assessing the progress of students in schools and preparing them for exams.
- Software for selection of options in the field of higher education for applicants.
The company's business is growing very fast, and up-to-date information on the structure and geography of revenue is in the company's latest quarterly report. According to the report, her earnings are divided as follows:
- Subscription - 90,5%. Customer access to company software for a fee. Segment gross margin — 58% from its proceeds.
- Professional services and more - 9,5%. These are personnel training services at customer enterprises, as well as setting up Instructure software. Segment gross margin — 45% from its proceeds.
The company's clients are mainly educational institutions ranging from schools to universities - they give 99% proceeds. But there are also corporate customers among the company's clients., who pay to access its platform and create educational content for their employees, to improve their skills, - This is 1% company revenue.
Revenue by country and region is distributed as follows: USA - 81%, and 19% - the rest, unnamed countries.
The company is unprofitable.
Arguments in favor of the company
Fell down. Since November, the company's shares have fallen sharply: with 28 to 21,01 $. So,, we can pick them up in anticipation of the rebound.
Promising. The topic of distance learning is very promising and has not yet exhausted its full potential for growth.. In the United States, despite the negative results of the remote learning experiment – many students perform worse, than live learning., – schools are actively canceling live classes and introducing remote education.
This indicates, that the government is serious about continuing to develop online learning regardless of the results.
The American school will also be driven to the online transition by the aggravation of socio-political and interracial contradictions in American society - government schools in growing disadvantaged areas will be the first candidates for digitalization.. But the radicalization of young people from higher strata will also force the administration as schools, and richer universities to switch to online learning to the maximum, to avoid the stilettos and bricks of the rising Red Guards.
As for universities, then the eternal pandemic significantly limits the influx of foreign students into Western universities, which represent the most important source of income for universities, - which means, it makes sense to develop online learning. Including on the Instructure platform.
The corporate education segment of the company also seems promising: in the United States, rising consumer demand and economic growth are now facing a shortage of workers among enterprises.
One way to solve this problem for business owners is labor automation.. But so far, robots and algorithms do not solve the lion's share of business problems., so in the medium term, I would expect American enterprises to increase their investment in improving the skills of existing workers. For Instructure, this is not the main source of income, but this segment will still pleasantly surprise the shareholders of the company with its growth indicators.
Well, that fact, that the topic of online learning looks like something very promising, will attract a lot of investors to the company's shares.
Capitalization. The company has a capitalization of only 2.95 billion dollars - this will greatly facilitate the pumping of its shares by a crowd of investors in the future..
Can buy. The company's revenue retention rate is 115,6% - it squeezes more than enough money out of its existing customer base to, to compensate for the damage from the outflow of some users. This makes her business quite stable..
In combination with a low price in absolute numbers, it will not be surprising, if the company is bought by someone bigger. May be, even some Ivy League university. Furthermore, after the recent strong fall in stocks, this option seems very likely.
What can get in the way
Aims and means. The company's target market is $15 billion.: 5 billion is, actually, systems for managing the educational process, and also 10 — other solutions in the field of online education, offered by the company.
The company's target market could double further as, How will it expand its range of offerings?. But now it's hard to say, How realistic are these plans?. This brings us to the nasty conversation about the cost of Instructure..
The company is worth almost 30% your target market, but it takes less 4%, a P / S she has 7,7. All in all, even after the stock has fallen, it is worth a lot, and it will scare off a potential buyer. And investors will also be uncomfortable with this..
Owners. The company has already been listed on the stock exchange, and in 2020 it was bought by the private foundation Thoma Bravo, it is now the dominant shareholder of Instructure. There is a possibility, that Thoma Bravo will infringe on the rights of minority shareholders like us, although the space for such actions is small.
But in theory it is possible, at which Thoma Bravo refuses to sell Instructure at a price that suits minority shareholders in the hope of making a big profit on their investments. After all, if the deal for the sale of Instructure will be discussed, then it will take place in the context of the increased attention of equity holders of private funds to the profitability of funds. In its turn, funds are expected, that they will greatly overtake the indices, and therefore it encourages fund managers to demand more returns on their investments.
Accounting. The company went to IPO, to pay off debts. The amount of her debts is very large: 926,297 million dollars, of which 325.938 million must be repaid during the year. There is not much money at Instructure's disposal: 227,487 million on the account plus 54.759 million debts of counterparties. Considering its loss, I would expect that, that the debt will grow.
This will scare away some investors - after all, the cost of loans is expected to rise.. Well, the threat of bankruptcy is very visible here.. That's why, certainly, it is in the interest of Thoma Bravo and other shareholders to sell the company now.
Volatility. Unprofitable companies are by definition volatile - this needs to be understood and accepted.
What's the bottom line?
Shares can be taken now by 21,07 $. And then we have the following options:
- wait for growth to 25 $. This will be an acceptable premium to the purchase price of the company, and investors may well pump stocks to this level in the hope, that online learning will soon become the most promising direction. Here, one should expect a period of about 14 Months;
- wait for the shares to return to 28 $. It will take about three years.
Anyway, keep in mind, that this idea is very volatile.