Udemy IPO: Quick Analysis of the Edtech Unicorn

Udemy's IPO: A Detailed Look

Udemy, a leading edtech company valued as a unicorn, launched its initial public offering (IPO) at $29 per share. This price represented the highest point within the company’s previously stated IPO range.

Based on the number of shares issued, Udemy’s valuation at the IPO price was approximately $4 billion. Utilizing a fully-diluted share count, this valuation increases by several hundred million dollars.

Initial Reaction to the IPO

The Udemy IPO could initially be perceived as a positive development for the edtech sector. The company successfully sold over $420 million in stock to the public.

Furthermore, the IPO price exceeded the valuation established during its last round of private funding.

Trading Performance and Investor Sentiment

However, the initial trading performance presented a different picture. As of this writing, Udemy shares experienced a decline of $1.80 per share, representing a drop of just over 6%.

This opening-day performance falls short of the ideal outcome typically sought by company leadership.

Investors also appear to be reacting cautiously to the initial trading results.

Further Analysis and Observations

Having closely monitored Udemy’s financial progress and its pricing strategy, we aim to provide some key observations regarding the final details of the Udemy IPO.

These observations are based on a comprehensive review of the IPO’s accounting as it has unfolded.

A Transition to Business Sales Doesn't Guarantee Growth

Despite recent trading declines, Reuters estimates Udemy's valuation at $3.7 billion. Udemy reported revenues between $125.7 million and $130.9 million for the third quarter, according to its own assessments.

This revenue figure translates to an annualized run rate of $523.6 million for the company. Consequently, Udemy’s current valuation represents a multiple of 7x its existing revenues.

For software businesses focused on business-to-business (B2B) sales, this is a comparatively modest multiple. The company’s relatively stagnant revenue performance in 2021, when contrasted with 2020, is a key contributor to this lower valuation relative to typical SaaS benchmarks.

However, expectations of restrained growth in the near future also play a role. Furthermore, the evolving investor perception of the edtech sector following the pandemic may be influencing this assessment.

The Potential of Corporate Clients

Therefore, while Udemy’s strategic move towards selling to larger, more stable corporate clients is a positive step, its impact on overall revenue growth remains to be seen.

Until this shift demonstrably stimulates net revenue expansion, the company’s valuation is likely to remain at its current level. Continued monitoring of revenue performance will be crucial.

Udemy’s success hinges on its ability to capitalize on the potential of the B2B market and translate it into tangible financial gains.

Edtech Valuations in the Private Market Appear to Be Stabilizing

According to Crunchbase, Udemy’s last private valuation stood at $3.25 billion. PitchBook estimates it at $3.3 billion. Despite this, the company did achieve a valuation exceeding its final private price, albeit by a modest margin.

Considering the current startup landscape, where companies frequently secure multiple funding rounds within a year and significantly increase their valuations—even after reaching the $1 billion 'unicorn' status—a more substantial valuation increase for Udemy’s IPO might have been anticipated.

Effectively, when accounting for newly issued shares and their assessed value, the company’s pre-money IPO valuation closely mirrors its post-money valuation from the Series F funding round. Private-market investors, in November 2020, essentially paid prices reflective of 2021 public market conditions for Udemy stock during the Series F announcement.

This investment strategy appears suboptimal, particularly considering the subsequent appreciation of other asset values over the past year.

A recent TechCrunch survey of edtech investors revealed a shift in market sentiment. While acknowledging a resurgence in the sector, venture capitalists indicated that edtech hasn’t experienced the same valuation growth as industries like fintech or e-commerce.

Our analysis of the edtech market suggests a somewhat pessimistic outlook. Did valuations rise to such an extent during the exceptional growth period of 2020—driven by the pandemic’s impact on traditional education—that they now limit the potential for value accretion through near-term public offerings?

Investors in the same survey also noted that while valuation gains may be limited, edtech companies could be seeing an increase in successful exits.

Udemy’s experience suggests that exits for similar companies might be delayed as they seek to demonstrate additional growth over several quarters, ensuring favorable returns for their venture capital backers.

Duolingo presents a contrasting example, offering a different perspective on the broader edtech landscape observed in recent quarters.

• The edtech market experienced significant growth in 2020 due to pandemic-related disruptions.
• Private market valuations may have peaked, impacting IPO performance.
• Exits may be delayed as companies aim to bolster financial results.

Key Considerations for Edtech Investors

Understanding the nuances of the edtech market is crucial for investors. Factors such as pandemic-driven growth and evolving investor sentiment play a significant role in company valuations.

The comparison between Udemy and Duolingo highlights the diverse performance within the sector. Careful analysis of individual company metrics is essential.

Udemy's IPO in the Context of the Edtech Landscape

Udemy's initial public offering (IPO) follows a recent trend of edtech companies entering the public market, including Nerdy, Coursera, Powerschool, and Duolingo.

However, the market response to Udemy differs significantly from that of Duolingo, whose stock price surged upon its debut, even after adjustments to the IPO price range.

This disparity in investor reaction may stem from fundamental differences in their business models; Udemy primarily targets enterprise clients, while Duolingo focuses on individual consumers.

Monetization Strategies and Valuation

Distinct approaches to revenue generation contribute to varying company valuations.

Coursera, emerging alongside Udemy during the rise of massive open online courses, also recently became a publicly traded company.

Interestingly, Coursera experienced a positive jump in its share price when trading commenced.

While Coursera aims to revolutionize higher education, Udemy concentrates on providing concise courses in collaboration with businesses seeking to upskill their workforce.

Despite this, both companies prioritize sales to enterprises, making Coursera’s success and Udemy’s initial struggles particularly noteworthy.

Comparisons to PluralSight and Market Sentiment

Udemy’s trajectory can be compared to that of PluralSight, which was acquired for $3.5 billion a mere two years after its IPO.

Like Udemy, PluralSight delivers edtech solutions to enterprise customers and represented a significant exit within the sector last year.

However, its acquisition was also interpreted by some as an indication of how public markets evaluate these types of companies – a potentially unfavorable assessment for sustained public trading.

A less-than-ideal debut doesn't necessarily predict a company’s ultimate fate.

The stock market is inherently volatile, and the edtech sector is relatively new to public investment, making it difficult to definitively identify long-term winners.

It’s important to remember that edtech operates differently than traditional Software as a Service (SaaS) models.

Looking Ahead

Udemy still achieved an exit valuation exceeding its previous private assessment.

The accelerating digitization of the workforce could potentially fuel further growth and value for the company over time.

For the edtech industry, which has historically lacked substantial exits, Udemy’s entry into the public markets provides valuable data regarding the valuation of companies focused on both mission and profitability.

With an expanding pool of strategic and financial acquirers, an increase in exit volume within the sector is anticipated.