Article

Is the Edutainment theme still relevant? Revisiting fundamentals

The year 2022 was particularly difficult for companies operating within early-stage themes such as edutainment – small, fast growing, and less profitable. They are usually punished when inflation exceeds expectations, but they also tend to be favored when inflation falls below expectations. We remain focused on the theme’s attractive fundamentals – its fast growth, its counter-cyclical nature, and capital support from private investors and governments.

February 14, 2023

Dr. Kirill Pyshkin

Senior Portfolio Manager, Credit Suisse Asset Management Thematic Equities

"This House Believes Education Should Move to the Metaverse."

Title of the flagship debate at one of the largest and longest-running online education conferences in the world – Online Educa Berlin (OEB) in November 2022.¹

In this Insight, we revisit the fundamental concepts of the Edutainment theme. This is in response to 15 months (until June 2022) of significant underperformance in the sector compared to the broader equity market, which has given rise to understandable frustration for our team and many of our clients, and has led some short-term investors to question whether the Edutainment theme is damaged or broken beyond repair. Our message is clear – we believe the underlying drivers behind the theme are very much intact and remain highly relevant in the world today. We therefore expect patience to pay off, and encourage our readers to use the current equity market decline to take a fresh look at the fundamentals of this compelling, early-stage theme, which we believe offers significant growth potential over the long term.

Student enrollments are counter-cyclical and improve with a weakening job market

Our main hope for 2022 was to see an increase in student enrollments with the weakening job market and improving student engagements with post-lockdown mental fatigue fading away. Student enrollment is the main driver of fundamentals in the education sector, since the sector revenue growth is the product of the number of students multiplied by spend per student. Despite the unusual resilience of the job market, which until very recently showed no sign of weakness in face of the now widely expected recession, student enrollments and engagements have normalized judging by the latest quarterly commentary issued by Chegg, the bellwether in this case.

"We regularly monitor the trends in education and, as has been reported, US undergraduate enrollment has stabilized and returned to pre-pandemic norms. What has changed is that students are increasingly going to institutions offering online and hybrid classes, which are now available at over 50% of US higher-education institutions. In addition, 59% of US students are now majoring in Science, Technology, Engineering, and Mathematics (STEM) and Business, with more than 80% taking STEM-B courses. Our data also suggests students are spreading their course load over the full year. We believe these trends are all positive for Chegg."

Dan Rosensweig, CEO of Chegg, on the quarterly call on November 1, 2022.¹

We expect further improvements in student enrollments in the coming quarters, as the job market is finally showing some signs of weakness. After mainly hearsay reports of large-scale layoffs, especially in the tech sector, including several high-profile public companies such as Meta, Netflix, and Twitter, and some private companies, Crunchbase estimates that a total of 85,000 US tech sector jobs disappeared in 2022.³

The latest data from ADP is also finally showing that hiring at US companies slowed in November, falling to its lowest level in nearly two years, while wage gains also moderated. In fact, manufacturing lost 100,000 jobs in November only, followed by 77,000 jobs lost in professional/business services, 34,000 in finance and 25,000 in IT.⁴Accompanying the November edition of the ADP National Employment Report, Nela Richardson, chief economist at ADP, said in a statement: “In addition, companies are no longer in hyper-replacement mode. Fewer people are quitting and the post-pandemic recovery is stabilizing.”⁵

The longer-term education sector is growing and forecasted to reach USD 10 trn by 2030

Longer-term student enrollments are growing, structurally driven by population growth and multiplied by globalization and economic growth. Over the next 30 years, there will be an additional one billion graduates in the world, 75% of whom will come from Africa and Asia, according to HolonIQ.⁶ Global expenditure on education and training is expected to reach USD 10 trn by 2030, compared to about USD 7 trn today.⁷

Overall spend on education is growing at a compound annual growth rate (CAGR) of 3.6%. K-12, the largest segment, is growing at 4.2%, with a spend of USD 3.2 trn. Spend on workforce training is growing at 3.9%, with USD 400 bn. The USD 340 bn spent on pre-K represents a growth rate of 2.3%, while post-secondary has the slowest growth of 1.2% CAGR, with a spend of USD 2.2 trn.⁸ However, even within this slower-growing segment, there are interesting, faster growing opportunities, such as the USD 200 bn international education segment, which is growing at 7.4% CAGR.

We are still in the very early stages of multi-year double-digit growth in EdTech

On top of the structural growth in the global spend on education, penetration of technology in education (EdTech) is increasing from its very low levels (below 5% today), even after the COVID-19 catalyst. As a comparison, cellphone penetration was at a comparable level between 1997 and 1998, yet after that, the number of cellphone subscribers grew by double-digit figures for the next 15 years to reach the maturity level that we are enjoying today.⁹Similarly, we are expecting many years of double-digit growth in EdTech from today, driven by digital transformation in the huge (and growing) education sector.

EdTech remains at a nascent stage

Source: HolonIQ, February 2021 forecast: Sizing the Global EdTech Market. Mode vs Model. Retrieved on 08.12.2022.

The companies that we follow are growing even faster than the EdTech sector because we search for disruptors and innovators who are gaining market share and outdoing their peers. According to Bloomberg, over the last twelve months in aggregate, these types of companies increased revenues by 26% and net income by 28%, with expected long-term earnings per share (EPS) growth of 21%.

The intersection of education and work skills remains one of the faster-growing areas

Within the already fast-growing EdTech market, there are certain segments that are turbo-charged. One of these segments, which we identified back in 2020 and have written at length about,¹⁰is alternative credentials and short courses. These are even more attractive if they directly relate to upskilling or jobs. Companies that can provide shorter courses like these that are relevant for businesses have grown at some of the fastest rates in EdTech. For example, in the latest quarter, year on year, Udemy’s business segment grew 67%,¹¹ while Coursera’s enterprise segment grew 51%^.12 According to HolonIQ,¹³ the USD 9.9 bn micro and alternative credentials market will remain one of the fastest-growing areas in EdTech.

COVID-19 has accelerated growth and attracted new capital for future growth

COVID-19 was the catalyst for the digitalization of education, and the actual forecasts for EdTech sector growth have gone up since the pandemic. For example, HolonIQ now expects 16.3% CAGR from now until 2025, compared to its pre-COVID-19 forecast of 13.4%. This is because COVID-19 has given the sector a boost in three ways:

It removed the bottlenecks on both the supply and demand sides. On the one hand, teachers were left with no choice but to adopt new technologies, regardless of whether they were unwilling or felt unable to do so. On the other, all doubts were erased among students and their parents that education could be delivered online.
It highlighted how unprepared schools and universities were. Many described the sensation during the early months of lockdowns as “firefighting” – scrambling for any available systems and tools able to deliver online education, whether suited for the purpose or not. Now, many are transitioning the specialized tools, aided by available funding.
It increased capital flow into the sector, thus boosting innovation and investments. As for any emerging sectors, this increase was led by venture capital (VC) inflows, and these VC investors will eventually look for an exit and monetization opportunities. This often takes place through an initial public offering (IPO), typically five years down the line – for us, that would mean more exciting companies in the future.

VC investments in EdTech and HRTech have tripled

¹ Information derived from analyzing data from PitchBook Data, Inc. Data for the chart as per end of the calendar year. Retrieved on 22.04.2022.

US federal funding will continue to provide an additional boost to spending on systems and tools

In 2021, we highlighted that the USD 217 bn in the American Rescue Plan specifically earmarked for education, a significant amount equating to roughly 20% of annual federal spend on education, should provide a tailwind for EdTech for the next three years. We believe that the availability of that funding was one of the reasons why we saw some of the best returns in 2022 from the B2B education software providers, such as those selling learning management systems (LMS) and student information systems (SIS). The good news is that most of that funding is still available: according to Hardeep Gulati, CEO of PowerSchool, “Our confidence is further reinforced by a considered strong funding environment further supported by a 3/4 of ESSER [Elementary and Secondary School Emergency Relief] funding still being available for district to spend over the next few years”¹⁴.

Edutainment is continuing to gather momentum and recognition: the metaverse is the future

As one example, our colleagues on the Credit Suisse eLearning team were recently named team of the year at the Learning Technologies Awards 2022. In their submission, they highlighted the use of edutainment with gamification, storytelling, and videos. In one e-learning module, learners chose an avatar and used a game-line task bar with lives and items collected on the mission. This made a potentially dry topic highly engaging. In another, a film noir theme was used throughout the module, with storytelling. A suite of e-learning modules on leadership topics used drama to bring the content to life.

We also remain convinced of the future potential of the metaverse, including for education. Tellingly, the highlight of OEB, one of the largest online education conferences and trade shows that we attended in 2022, was the debate entitled: “This House Believes Education Should Move to the Metaverse”¹⁵.

Conclusion

2022 was difficult for the equity market in general, but especially for the types of company that populate the spectrum of any early-stage theme such as Edutainment – small, fast growing, and less profitable. These are the exact factors most punished when inflation exceeds expectations, but conversely, they are also the ones most favored when inflation is below expectations. We remain patient in the meanwhile, revisiting the attractive fundamentals in the theme – its fast growth, driven by structural factors that should persist for many years, its counter-cyclical nature that should work in a weak economy, and capital support from private investors and governments.

Credit Suisse Asset Management has designed a number of highly focused strategies to provide clients with “pure-play”¹⁶exposure to a number of compelling long-term secular growth themes, such as Robotics and Automation, Security and Safety, Digital Health, Edutainment, Environmental Impact, and Thematic Opportunities.

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To the extent that these materials contain statements about the future, such statements are forward looking and are subject to a number of risks and uncertainties and are not a guarantee of future results/performance.

The individuals mentioned above only conduct regulated activities in the jurisdiction(s) where they are properly licensed, where relevant.
The companies mentioned above are meant for illustration purposes only and are not intended as a solicitation or an offer to buy or sell any interest or any investment.

¹https://oeb.global/conference; retrieved on 05.12.2022.
²Chegg Q3 2022 quarterly results call, Bloomberg transcript.
³Tech Layoffs: US Startups and Tech Companies with Job Cuts In 2022 (crunchbase.com); retrieved on 07.12.2022.
⁴ADP National Employment Report, 30.11.2022; accessed via Bloomberg.
⁵US Firms Slow Hiring and Wage Gains Moderate, ADP Data Show, 30.11.2022, Bloomberg news article.
⁶$196B International Education Market set to reach $433B by 2030 @ 7.4% CAGR (holoniq.com); retrieved on 05.12.2022.
⁷Education in 2030: Five scenarios for the future of learning and talent (HolonIQ PDF); p. 8.
⁸HolonIQ presentation at the OEB, November 2022.
⁹Mobile penetration rates (areppim.com); retrieved on 07.12.2022.
¹⁰December 2020 Credit Suisse Asset Management Equities and Thematic Investing Insight: Edutainment. From learning to earning (am.credit-suisse.com).
¹¹Udemy Investor Presentation Q3 2022 (investors.udemy.com); p. 27.
¹²COURSERA Q3 2022 Investor Presentation (q4cdn.com); p. 4.
¹³HolonIQ presentation at the OEB, November 2022.
¹⁴PowerSchool Q3 2022 earnings call transcript of 07.11.2022; accessed via Bloomberg.
¹⁵https://oeb.global/conference; retrieved on 05.12.2022.
¹⁶By “pure-play,” we mean companies which have at least 50% in revenues directly attributable to the corresponding theme.

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