My thesis for Coursera (COUR)
Virtually all useful knowledge exists somewhere on the internet. Therefore, it makes perfect sense for an online marketplace for learning to emerge.
As the first mover in this space and with many prestigious companies and universities offering courses on their platform, Coursera is well-positioned to continue to be a clear leader in the space with an addressable market that is in the hundreds of billions of dollars globally.
Additionally, as Practical Islamic Finance (PIF) seeks to only invest in halal things, there are few more noble endeavors than those which aim to spread useful knowledge in the world and make it more accessible to more people.
The Holy Quran says (translated into English):
say, oh my Lord increase me in knowledge
What are the numbers telling us?
In their quarterly report for the full year of 2021, top line revenue grew by around 40% compared to the full year of 2020.
Rather than looking at the rest of the numbers in isolation, it would be more useful to view them as a percentage of total revenue so that we can gauge how the business is evolving.
In the calculations I made below, we can see the cost of revenues for Coursera as a percentage of total revenues has decreased in 2021 compared to 2020.
The gross profit margin increased to 60% compared to 52% in 2020 and 51% in 2019.
It is concerning that Selling General and Admin expenses increased as a percentage of total revenue compared with the prior two years. In 2021 it was 61% compared to 49% in 2020 and 47% in 2019.
When you see this trend of increasing Selling General and Admin expenses as a percentage compared to total revenue you want to ensure that this is not indicative of the company struggling to generate more revenue
I did a little digging into this number and it turns out that the real problem with Coursera’s operating expenses is their total stock-based compensation expense, which is embedded into the other operating expenses.
In 2021, stock-based compensation was $91 million compared to $16 million in 2020. This is the main contributor to the increase in operating expenses.
The reason why I think Coursera has been so generous in its stock-based compensation is the following:
You see, Coursera’s basic earnings per share for 2021 were -$1.28. compared to -$1.80 the year prior. This suggests we’re moving closer to profitability.
However, the reason why EPS appears as though we’re moving closer to profitability is because there are more shares. So the loss is distributed amongst more shares.
I suspect Coursera’s management figured the most advantageous time for a company to issue stock-based compensation is when it is losing money because when they dilute the number of shares (make more of them), the earnings per share appears to be heading in the right direction.
This is why I think Coursera has been rather liberal with their stock-based compensation.
That said, I don’t think this trend will continue.
In their next earnings call I’ll be listening for any commentary on the company’s plans for stock-based compensation moving forward.
The good news is stock-based compensation is not necessarily something structural to the business.
Coursera’s Guidance for 2022
Coursera expects top-line revenue to grow 30% in 2022
If achieved, this translates to $540 million in total revenue for 2022.
If we assume the price-to-sales ratios at the end of the year remains close to 6 and with an expected 30% growth for next year, this would lead to a market cap of $4.2 billion by the end of the year and a 46% increase in the share price (assuming no dilution), imputing a share price of$29.17. Given this forecast, and my target return of around 30% annually, as long as the stock is less than $22.50, I am a buyer. That is, unless and until other material information is revealed that changes my forecast.
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Disclaimer: The author holds a long position in Coursera. This is not to be understood as personalized investment advice. Make sure to do your own due diligence before making any investment decisions.