Some industries have been overdue for reform for a few years – more like decades, and private education is one of them. The curriculums and teachings that used to work may no longer be valid in today's quickly changing economy and job market. Overcome by technology and the advancing size of the "online economy," there is one stock that could soon attract the attention of investors.
The name? Udemy (NASDAQ: UDMY) stock, and for reasons that you will soon discover, there are plenty of reasons why some of Wall Street's biggest names are joining the bullish party by upgrading the stock and its price targets. Even some prop traders at the big banks may find enough reasoning behind a potential buy in UDMY stock.
Even its closest competitor, Coursera (NYSSE: COUR), can't come close to offering value at the same attractive discounts that Udemy delivers. Surprisingly, Udemy still drives above Alphabet (NASDAQ: GOOGL) and its own educational platform in Google Certificates. You should read this if your portfolio needs to catch up with the gains seen in the NASDAQ names hitting all-time highs today.
The whole enchilada
When professional traders at an investment bank or hedge fund begin their day wondering, "Where should I look to allocate some money," the story begins a bit like this. Through a process called "top-down" analysis, these traders will likely start digging into economic data to spot specific outlier industries to consider.
One of the leading economic indicators these traders look at is the ISM manufacturing/services PMI index, where a direct gauge of industry activity can be found. This can also make it a lot easier for you to find the pockets of the economy that are worth a second look.
So, what does the PMI say about the education space? After showing a relatively flat reading in November and a slight contraction in December, the education services industry has pumped out a newfound expansion reading to start the new year.
Now, imagine you are a manager or business owner expecting a new trend of expansion and demand in your operation or those around you. In that case, it is most likely that "hiring" ads will be up across the board. After all, you'll need employees to cater to the expansion activity, right?
This is why the second hottest economic indicator, the employment situation report (better known as NFP), shows the same trend. The United States' economy added 353,000 jobs in total. And 11,800 (3.3%) went to private education services, not those with public education systems.
Are you starting to get the bigger picture now? Good, because there's more to it. Udemy stock has been left behind by the broader Technology Select Sector SPDR Fund (NYSEARCA: XLK) by as much as 25.4% over the past twelve months.
Last time the market checked, Udemy was still a tech stock, so now you have a double-digit gap to close down against the sector. Analysts and markets know this, which is why they are starting to plum the stock for a killer rally coming soon.
Close the gap
Starting with analyst targets, those working at Morgan Stanley (NYSE: MS) felt comfortable boosting their view from $12 a share to $15 a share, calling for a net upside of 3.4% from today's prices. You will soon realize that these targets may very well be on the conservative side of the spectrum.
Truist Financial (NYSE: TFC) analysts also landed on a $15 price target, which, alongside Morgan Stanley's targets, may soon be overdue for a boost. At least, that is what the market seems to be thinking when it values the stock in its own way.
Two things will become apparent to you in the following breakdown of Udemy against Coursera for a closer "apples-to-apples" comparison. You must first consider how much analysts expect earnings per share to grow in the next twelve months. Secondly, how much are markets willing to pay for this growth?
With a projected 580% EPS growth next year, analysts are placing Udemy head and shoulders above Coursera, which only expects growth of 70.6%. Now, which company would you rather pay a premium for? Obviously, above-average growth is worth paying for here.
On a price-to-book basis, which could be a better way to value these stocks with the upcoming changes in interest rates set by the FED, Udemy takes the spotlight. At 6.4x, it stands at a premium of 44.9% above Coursera's 4.4x valuation. Remember the saying, "It must be expensive for a reason."
Now you know the reason, and probably other professional investors – and traders alike – will be potentially jumping into this justified growth story.
