The Market Fall of EdTech Will Have Non-Financial Impacts

Two weeks ago I posted a Twitter thread noting just how much publicly-traded EdTech stocks have fallen since last Spring, using Coursera’s March 31, 2021 IPO as a comparison date. My main point was that this situation will have impacts beyond company and investor finances.

Derek Newton expanded on this thread at Forbes with yesterday’s “It’s Been A ‘Brutal’ Year for Public Education Companies”. I have updated the chart used in the Twitter thread and in Forbes to make it more readable and to include the past two weeks’ data.

percent change in value of select EdTech stocks since Coursera IPO March 31, 2021

Note that only Pearson has had any positive return since the Coursera IPO date, with the other EdTech companies dropping from 17% to 83% in market value in just over a year. Also note that the overall market has dropped in this same time period, with the tech-heavy Nasdaq index dropping roughly 16%.

You can read Derek’s article at the link, but I’ll add the full email Q&A response below for context.

What do I see?

The picture is a little complex as EdTech valuations are partially driven down by the overall tech valuation plunge (see Meta, Zoom, and other stocks losing massive share). But clearly EdTech is its own driver, and there is a broad-based drop that investors are placing on the value of these companies. Part of what is happening is the investment community having a much more critical view on company forecasts and less wild-eyed models about company growth. Add to this situation some specifics such as Chegg lowering their guidance or Zovio losing the California lawsuit, and you get the current bloodbath in EdTech valuations.

What does it mean?

I’m not a financial analyst, and I care more about company strategy and operational capabilities. One thing it means is that we should expect increased M&A activity, both from healthier companies buying others for a bargain and from the massive amounts of private equity looking for a place to invest. Your favorite EdTech vendor is much more likely to acquire (or be acquired) in the next few years than they had been. And for publicly-traded companies, there will be increased investor pressure to get finances in order to limit losses and avoid takeover offers. For earlier stage companies looking for investment, they may not succeed and may not survive. Less stability in EdTech markets overall.

With ironic timing, just as Derek was posting on Monday, there was an article posted at Bloomberg stating that Indian EdTech behemoth Byju’s is in talks to acquire either Chegg or 2U.

Byju’s, an India online education startup, is in discussions to acquire a US target and likely to bid for either Chegg Inc. or 2U Inc., according to people familiar with the matter.

The Bangalore-based company has held talks with both Santa Clara, California-based Chegg and Lanham, Maryland-based 2U and the total value of a deal could be about $2 billion, said the people, who asked not to be named because of the sensitive nature of the negotiations. Chegg’s market value was $2.3 billion as of Friday’s close, while 2U had a market value of $756 million and more than $1 billion in debt and other liabilities.

Byju’s and its bankers are evaluating the financials of the two companies and aim to make an offer in the coming weeks, said one of the people. They have yet to agree on any final price and it’s possible no deal will ultimately materialize, the people said.

This is the type of news that I’m expecting to see more of in the coming year or two. Companies with real money see an opportunity to acquire financially weaker EdTech firms for bargain basement prices. Besides strategic acquisitions (think Byju’s if one of those deals go through), there will also be a likely increase in acquisitions by Private Equity firms (think Anthology buying Blackboard last year, but realize that it was really Veritas Capital making the acquisition and combining the companies).

The other, related news that I’m expecting to see is an increase in the number of companies that just can’t make it and go out of business or get sold off for parts.

The main point is to expect to see real operational impacts coming from the market decline, to the level that will impact schools.