Udemy: A Hidden Gem in the EdTech Sector?

At ANEK, we are always on the lookout for undervalued companies that the market may not fully understand. Udemy has caught our attention as one such company. While the broader market may be overlooking its potential, we believe Udemy has the potential to deliver significant returns—possibly several multiples—due to its high-quality SaaS business hidden within its structure, growing recurring revenues, and improving profitability.

However, despite multiple conversations with the CEO and competitors, we are not fully convinced yet. Let’s explore why we are keeping an eye on Udemy and what’s still missing for us to build full conviction.

Udemy’s Dual Business Model: Consumer vs. B2B

Udemy operates through two primary business segments:

1. Udemy for Consumers (UC): A marketplace for professional courses—think of it as YouTube but for learning. UC boasts over 200,000 courses across a wide range of subjects, with a focus on technology and AI. Most of Udemy’s customers in this segment purchase individual courses, while only about 10% subscribe to its membership program.

2. Udemy for Business (UB): This is Udemy's B2B offering, which provides enterprise organizations access to thousands of curated courses. Unlike UC, which relies on individual customers, UB generates recurring revenue through subscriptions from corporate clients.

Why is Udemy focusing on UB? Simple: Recurring revenues. Enterprises with over 1,000 employees are seen as a more stable customer base than individual consumers, and there is significant room for growth in the B2B space.

Udemy’s Competitive Advantage in the B2B Market

Udemy’s main strength lies in its unique position as a marketplace. Here’s why it matters:

• For individual consumers, the value of courses is often driven by certifications from recognized institutions, which is an area where Coursera has an edge.

• For businesses, however, employers care less about formal certifications. They want to deepen their employees' knowledge and skills in specific areas, which is where Udemy excels. The platform allows organizations to train employees in the latest technologies and specific skills—without the need for formal certification.

Udemy’s ability to filter and curate the best courses from its marketplace ensures that businesses get the highest-quality content, and the platform's speed of updating content gives it a competitive edge. For example, when ChatGPT was released, Udemy quickly launched hundreds of related courses, while competitors like universities were slower to respond.

The Power of Content Creation: A Thriving Marketplace

Udemy’s content creators earn significantly more on its platform than they would on others, which keeps them loyal to the platform. This creates a network effect where more creators lead to more content, which attracts more users, who in turn bring in even more content creators.

Udemy’s global reach also sets it apart. Most of its revenues come from outside the U.S., thanks to localized content and partnerships with local experts. This gives Udemy a significant edge over competitors who focus solely on English-language content.

Growth Drivers: A Shift in the Learning Landscape

The EdTech sector is projected to grow at a healthy rate in the coming years, with forecasts predicting a high single-digit to low double-digit growth. Udemy is well-positioned to benefit from this growth due to the ongoing shift from outdated in-person learning to more interactive, digital platforms.

Additionally, Udemy’s ability to upsell existing clients is a significant driver of growth. Currently, Udemy serves only 10% of employees within the organizations it works with, indicating significant room for expansion.

The ongoing AI revolution also plays a major role in Udemy’s growth. As jobs evolve and new technologies emerge, workers will need to continually update their skills to stay relevant, driving demand for Udemy’s courses.

Competition: LinkedIn and Other Players

Udemy’s main competitor in the B2B space is LinkedIn. However, LinkedIn competes primarily on price, lacks the same level of specialization in technology-focused content, and doesn’t have the same level of focus in Education, as it is an add on and not the main product. As such, Udemy is likely to continue dominating larger customers, while smaller organizations may lean towards LinkedIn for more budget-friendly options.

Market Challenges and Udemy’s Resilience

Despite challenges in the broader software and EdTech sectors, Udemy’s NDRR (for enterprises) remains strong at 104%, indicating that enterprise clients continue to value the platform. Even in a difficult macro environment, the company's large clients have seen minimal revenue churn, with only a slight decline in retention.

As the world continues to evolve technologically, Udemy’s services will become increasingly critical, and the company is well-positioned to capitalize on this long-term trend. A recovery in the broader SaaS sector, coupled with increased L&D (Learning and Development) spending by enterprises, could lead to an acceleration in Udemy’s revenue growth.

Profitability and the Path Forward

Udemy benefits from operational leverage typical of SaaS companies. As the company grows and its B2B business (UB) captures a larger share of overall revenue, Udemy’s profitability should improve, potentially reaching gross margins of up to 70%.

Despite its current weakness on UC, which is struggling to maintain market share, the shift toward UB presents a path to better profitability and long-term growth.

Why Is Udemy Trading at a 'low' Multiple?

One of the key questions is why Udemy is trading at such a low multiple (1.7x on the ARR) relative to other SaaS companies with similar growth prospects, which typically trade at multiples of 5 or higher.

The market is likely undervaluing the company because it’s not fully understanding the true value of the B2B business and the hidden quality of its SaaS offering. The consumer business (UC) is masking the growth potential in the enterprise space (UB). But the market could be right—perhaps AI will pose a greater threat to content creators than expected, or UC could continue to lose share.

Risks to Consider

Bearish investors might argue the following:

• Competition from LinkedIn: As companies cut back on budgets, LinkedIn might capture more share of the corporate learning space.

• AI as a Threat: The AI revolution could disrupt Udemy’s content creator model, where AI-generated courses could lower the demand for human-created content.

• Management Risks: The company is not founder-led, which could lead to a focus on short-term profits and shareholder dilution.

• Declining Consumer Business: The consumer-facing UC business continues to lose market share, and its future is uncertain.

• Content Creation by Employers: Large companies might create their own proprietary content, reducing their need for Udemy’s courses.

  
  

Final Thoughts: A Long-Term Play?

At ANEK, we see Udemy as a potential long-term play with a lot of upside. The company has significant strengths in its B2B segment, and its global reach, quality content, and network effect set it apart from competitors. However, there are risks—especially around the competition, management, and the future of content creation in the age of AI.

Ultimately, we are still in the process of understanding whether Udemy’s management can execute on this vision. If they succeed in capturing more share of the enterprise market and maintaining growth in the face of AI disruption, we could see a significant increase in valuation.

For now, Udemy remains an undervalued stock—but it may take some time for the market to realize its true potential. At ANEK, we’ll continue to track its progress, conduct in-depth research, and keep an open mind.

Disclaimer: This article is for informational purposes only and should not be considered financial advice. Our hedge fund may hold positions in the companies discussed and may actively trade in these securities. Our views are based on publicly available information and our internal analysis, which are subject to change without notice. We encourage readers to perform their own research or consult with a professional financial advisor before making any investment decisions. We assume no responsibility or liability for any errors or omissions in the content.