Buy these online education stocks, JPMorgan says, forecasting up to 57% gains

Online education stocks, the combination of modern tech and old-school school, got a boost from the COVID pandemic, and the support has been ongoing. The US education sector was worth $1.4 trillion in 2021, and is expected to reach $3.1 trillion by the end of the decade – and there’s plenty of room in those numbers for investors to find gains.

Covering the ed stocks for JPMorgan, analyst Brian Smilek has taken the measure of online education. As he writes, “The education sector is a large & growing market early in the secular shift online, with a GSV Ventures analysis suggesting the global learning market represents a ~$7T market, w/online learning ~2.3% penetrated at $160B in 2019. The COVID19 pandemic accelerated the secular shift toward online education, & GSV estimates online penetration will grow 5x at a 30% CAGR through 2026, implying 11% penetration, or a $1T TAM.”

Smilek goes on to make some specific stock recommendations, forecasting up to 57% gains for investors willing to buy into the sector. Using the TipRanks database, we’ve looked up the big picture on his picks, finding that the view from the Street includes double-digit upsides. Let’s take a closer look.

Duolingo (DUOL)

We’ll start with Duolingo, the popular online language learning app. This company has built its business and its reputation on the simple insight that people want to learn new languages – but don’t always have the open schedule to accommodate formal classes. The Duolingo app allows users to customize their language lessons – taking instruction at their own pace, on their own time, through a proven method that is both fun and effective.

Duolingo boasts that its language app is the world’s most popular online language learning tool, and that it holds the #1 spot as the top-grossing app in both the Apple App Store and Google Play. Prospective learners can choose from 40 or more languages, including Spanish, French, German, Arabic, and Japanese, as well as less common languages such as Greek, Welsh, Hungarian, and Hebrew. There are even ‘specialty’ languages available, like Latin, which is no longer a mother tongue, and Klingon, which was invented for Star Trek. At the end of 2023, the language app had 88.4 million monthly active users, up 46% year-over-year, and 26.9 million daily active users, up 65% y/y.

Those are solid user numbers, the type that will provide a sound foundation for any app, and Duolingo has leveraged them for sound financial results. The company turned to profitability in the first half of last year, and has remained profitable since; in its last reported quarter, 4Q23, Duolingo had earnings of 26 cents per share by non-GAAP measures. This was a significant improvement from the 35-cent EPS loss in the prior-year quarter, and it beat the forecast by 10 cents per share. At the top line, Duolingo’s quarterly revenues came in at $151 million, up an impressive 45% year-over-year and $2.62 million ahead of expectations.

The combination of a solid – and growing – user base with an effective learning tool and strong prospects for continued success all caught the eye of JPM’s Brian Smilek, who wrote of the stock recently, “Duolingo is our Best Idea across the education sector… Our bull thesis is based on: 1) Strong user growth driven by product optimizations, gamification/socialization, & social-first marketing strategy (JPMe MAU/DAU 2023-26E CAGRs of +21%/+33%); 2) deeper monetization & paid sub growth, w/tiered pricing strategy, Family plan, & new verticals extending LTV. We project paid subs doubling to 12.3M in 2026 (+23% 2023-26E CAGR); 3) Improved teaching efficacy unlocks TAM, with ~80%-90% of global language learners studying English but only ~45% of Duolingo users learning English; 4) GenAI enhances products/features & reduces costs; & 5) multi-year Adj. EBITDA margin expansion & FCF ramp. This translates to average 2024 & 2025 growth of 30% for revenue, 60% for Adj. EBITDA & almost 40% for FCF, and we expect positive full-year Operating Income & substantial Net Income growth in 2024.”

Tracking this forward, Smilek puts an Overweight (Buy) rating on the shares, and sets a $270 price target that suggests a one-year potential gain of 19%. (To watch Smilek’s track record, click here.)

Turning now to the rest of the Street, where the stock claims a Moderate Buy consensus rating, based on an additional 9 reviews that include 4 Buys and Holds, each, and 1 Sell. The shares are selling for $227.18 and their average target price of $247.88 implies a share appreciation of 9% in the next 12 months. (See Duolingo’s stock forecast.)

Nerdy, Inc. (NRDY)

The second stock we’ll look at, Nerdy, has become a leader in the use of online technology and AI to promote and enhance distance learning. The company operates a digital learning platform, offering students a variety of learning options, including one-on-one interactions, small-group remote classes, large-group live-stream classes, and even self-directed individual studies. The company calls its platform ‘AI for HI,’ or artificial intelligence for human interaction; the AI half allows for a smarter, more personalized learning experience, as the digital tutor reacts to the human interaction.

Students interact with the learning platform through multiple channels, including digital chats and two-way video links, and can connect with tutors 24/7. Courses are available in more than 3,000 subjects, taught by subject matter experts and experienced educators, and enhanced by thousands of hours of recorded video interviews and lectures. The result is an adaptive learning platform, that permits a ‘learner-centric’ approach for each student, through collaborative interactions between students and instructors, and humans and AI.

In the fourth  quarter of last year, Nerdy completed a switch to a subscriber-based business model, using a free-of-cost basic service to attract customers, who can then access more intensive course offerings through a paid subscription. It’s a familiar business model in the online world, and is popular with service providers for bringing in results. That was clear from Nerdy’s top line in 4Q23, which came in at $55.1 million, up 32% year-over-year – and just edging over the forecast by $330,000. At the bottom line, the company reported a non-GAAP net earnings figure of $2.2 million; this was a substantial year-over-year turnaround from the $6.8 million non-GAAP net loss in the prior year’s final quarter.

For JPM’s Brian Smilek, this background bodes well for the company in the long-term. Smilek writes, “With the Learning Membership transition complete, NRDY is introducing a freemium offering across both its Consumer & Institutional businesses to expand its reach, drive higher awareness, & serve as a conversion funnel. Initial demand signals have been encouraging across both Consumer & VTS, & we expect NRDY to continue testing the freemium model ahead of back to school later this year… Institutional execution remains healthy & we expect ESSER III’s 9/30 allocation deadline & federal/state tutoring-focused legislation to serve as key catalysts for demand in 2024 & beyond. Increased VTS scale should drive higher awareness for Nerdy’s DTC offerings, which could benefit Active Member & Consumer revenue growth. We’re positive on Nerdy’s GenAI/LLM strategy, which should drive higher LTV, engagement, & retention, along with cost efficiencies.”

Summing up, Smilek comes down to a simple, bullish statement: “We believe the combination of Learning Memberships, the freemium funnel, VTS, & GenAI/LLMs should support improved financial performance.”

That stance supports the analyst’s Overweight (Buy) rating on NRDY, and his price target, of $5, implies the stock will gain a robust 57% in in the year ahead.

Nerdy gets a Strong Buy rating from the Street’s analyst consensus, based on 8 reviews that break down 6 to 2 in favor of Buy over Hold. The stock is trading for $3.18 per share, and the average price target of $4.66 suggests a 12-month upside potential of 46.5% for NRDY shares. (See Nerdy’s stock forecast.)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.