It’s said that “knowledge is power.” The education sector is therefore the backbone of growth for any country or economy. Plus, the education sector will continue to grow at a steady pace, which will create substantial opportunities for education stocks, most notably undervalued education stocks.
The U.S. education market was valued at $1.4 trillion in 2021. The market size is anticipated to increase to $3.1 trillion by 2030. This would imply growth at a CAGR of 4.2%. Among the various trends in the education sector, the rise of online education after the pandemic has been noteworthy. Of course, in a post-pandemic world, there was a shift back to classroom learning. However, online courses are here to stay as they capture a bigger market by not limiting to one country or geography.
With a positive overall outlook for the sector, let’s talk about three undervalued education stocks to buy.
Chegg (CHGG)
Chegg (NYSE:CHGG) is among the most undervalued education stocks to buy. At a forward price-earnings ratio of 8, the stock seems to have bottomed out. I would gradually accumulate for a potential breakout on the upside.
For 2023, Chegg reported total revenue of $716 million and an adjusted EBITDA of $222 million. On a year-on-year basis, revenue declined by 7% as the Company continues to navigate post-covid challenges. However, I believe that the long-term outlook remains positive.
The first point to note is that Chegg has a big addressable market. The Company estimates that the current global market opportunity is 100 million students. With Chegg focused on building a personalized learning experience, I believe that subscriber growth will trend higher.
Another big positive is the adoption of AI. As an example, the cost to answer new questions is 75% less supported by AI and Chegg believes that cost will continue to decline. This is likely to have a positive impact on EBITDA margin and cash flow upside. The weakness is CHGG stock is therefore a good buying opportunity.
Coursera (COUR)
Coursera (NYSE:COUR) is among the largest online platforms with 142 million registered users. The Company has collaboration with 325 leading universities. It’s worth noting that the higher education market is valued at $2 trillion.
With increasing demand for online learning, the company is well-positioned to benefit. Further, in a dynamic world of technology, there is a continuous need for education on new skills.
With Coursera offering new programs for working adults, there is visibility for sustained growth. As an example, the Company introduced a new course, “Generative AI for Everyone from DeepLearning.AI.” This course saw more than 100,000 enrolments in its initial weeks.
For 2024, Coursera has guided for revenue of $730 to $740 million. Further, the company is expecting a 550-basis points improvement in adjusted EBITDA margin to 4%. If the margin expansion trend sustains in the next few years, I expect COUR stock to surge higher.
Perdoceo Education (PRDO)
Perdoceo Education (NASDAQ:PRDO) stock looks deeply undervalued at a forward price-earnings ratio of 8.3, with a yield of 1.88%. As an overview, Perdoceo Education is a provider of postsecondary education through online, campus-based, and blended learning programs. For 2023, Perdoceo reported muted revenue growth of 2.1% on a year-on-year basis to $710 million. Operating income growth was however healthy at 16.1% to $150.4 million.
An important point to note is that Perdoceo has been delivering relatively steady cash flows. Further, as of December 2023, the Company reported a cash buffer of $604.2 million.
With the company focused on inorganic growth, there is ample flexibility for acquisitions to boost earnings. At the same time, dividends are likely to increase over time. I must add that investment in technology is likely to support retention of students and Perdoceo has ample flexibility to invest in “student support teams and technology.”
On the date of publication, Faisal Humayun did not hold (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.