busypix Thesis Nerdy, Inc. (NYSE:NRDY), a leader in online learning platforms, is positioned to capitalize on the increasing demand for remote education and tutoring services. The company’s comprehensive learning solutions, leveraging artificial intelligence to connect learners with experts, provide a significant growth opportunity. However, Nerdy faces challenges such as intense competition, high marketing expenses, and the need for continued technological innovation. With a mixed financial performance and strategic investments in growth, a cautious approach is warranted. Therefore, I recommend a Hold on NRDY stock while monitoring its progress closely. Company Overview Founded in 2021 and headquartered in St. Louis, Missouri, Nerdy Inc. operates a platform for live online learning. The company’s flagship business, Varsity Tutors, is one of the nation’s largest platforms for live online tutoring and classes. Nerdy’s proprietary platform offers numerous subjects and multiple learning formats, including one-on-one instruction, small group tutoring, and large format classes. The company caters to both individual consumers and educational institutions, aiming to transform the learning experience through technology. Main Segments According to Nerdy’s Q1 2024 10Q report, the company operates through two primary segments: Consumer: This segment provides direct-to-consumer services, including tutoring and other educational services. In Q1 2024, the Consumer segment generated $41.6 million in revenue, up from $40.3 million in Q1 2023, driven by increased demand for personalized learning solutions. Institutional: This segment focuses on providing educational services to institutions, such as schools and universities. The Institutional segment reported revenue of $11.9 million in Q1 2024, a significant increase from $8.5 million in Q1 2023. The growth in this segment is attributed to the adoption of Varsity Tutors for Schools, which offers high-dosage tutoring and online learning solutions. Recent Financial Performance For Q1 2024, Nerdy reported total net revenue of $53.7 million, up from $49.2 million in Q1 2023, reflecting a 9% year-over-year growth. The Consumer segment contributed $41.6 million, while the Institutional segment added $11.9 million. Despite the revenue growth, Nerdy posted a net loss of $12.0 million, an improvement from the net loss of $32.3 million in the same period last year. The reduction in net loss was primarily due to the absence of unrealized losses on derivatives that significantly impacted the previous year’s results. Segment Performance In terms of Q1 segment performance, it is clear to see where the company’s growth initiatives are focused. Consumer Segment revenue increased by 3% year-over-year, driven by higher utilization of services. The gross profit margin for this segment was 68%, slightly down from 69% in Q1 2023, due to higher expert costs. Meanwhile, the Institutional Segment revenue grew by 39% year-over-year, reflecting strong adoption of Nerdy’s offerings by educational institutions. The gross profit margin for this segment improved significantly due to economies of scale and increased service utilization. Overall Market Size The global online education market is projected to reach $350 billion by 2025, growing at a CAGR of 9.23% from 2020 to 2025. Factors driving this growth include the increasing penetration of internet services, the adoption of mobile learning applications, and the rising demand for flexible learning solutions. Nerdy’s innovative platform positions it well to capture a substantial share of this expanding market. Valuation, Growth, and Profitability As with any young growth company, it is somewhat difficult to compare Nerdy to established peers. As expected, the results are mixed. Here is a breakdown of how the company stacks up in terms of valuation, growth and profitability. Table 1: Valuation Valuation NRDY LINC APEI CHGG VSTA DAO P/E Non-GAAP FY1 – 21.83 12.67 2.64 7.61 NM P/E Non-GAAP FY2 17.42 19.41 7.89 2.49 5.6 13.91 P/E Non-GAAP FY3 – – – 2.62 5.76 4.8 P/E Non-GAAP TTM – 20.48 NM 2.5 NM – P/E GAAP FWD NM 34.36 22.59 NM 28.98 NM P/E GAAP FWD NM 12.45 NM NM NM NM PEG Non-GAAP FWD – 1.46 0.84 0.11 0.07 – PEG GAAP TTM – 0.08 – – – – Price/Sales TTM 0.92 0.8 0.48 0.43 0.82 0.56 EV/Sales FWD 0.65 0.95 0.65 0.77 1.25 0.79 EV/Sales TTM 0.78 1.02 0.67 0.71 1.31 0.83 EV/EBITDA FWD 17.03 10.18 6.1 2.87 4.16 36.07 EV/EBITDA TTM NM 25.05 7.13 6.4 5.82 NM Price to Book TTM 3.72 2 1.15 0.28 0.27 NM Price/Cash Flow TTM NM 30.41 5.37 1.22 4.96 NM Click to enlarge Source: Seeking Alpha Analysis: Nerdy’s valuation metrics indicate a mixed outlook. The company’s forward P/E ratios suggest potential growth, but its high EV/EBITDA and Price to Book ratios compared to peers indicate it may be overvalued. Investors should be cautious and look for signs of sustained profitability. Table 2: Growth Growth NRDY LINC APEI CHGG VSTA DAO Revenue Growth YoY 20.03% 11.65% 0.67% -6.54% 20.02% 12.90% Revenue Growth FWD 21.25% 9.62% 2.12% -5.55% 16.10% 9.01% Revenue 3 Year CAGR 19.66% 9.40% 21.71% -0.38% 20.34% 24.18% Revenue 5 Year CAGR 21.84% 8.30% 15.37% 15.53% 8.57% 47.90% EBITDA Growth YoY NM -28.23% 54.03% -21.33% 43.33% NM EBITDA Growth FWD NM 18.65% 10.85% -10.89% 17.58% NM EBITDA 3 Year CAGR NM -18.24% 7.08% -17.87% 64.92% NM EBIT 3 Year CAGR NM -29.82% -2.35% NM NM NM Net Income 3 Year CAGR NM -22.12% NM NM NM NM EPS Growth Diluted YoY NM 148.28% NM NM NM NM EPS Growth Diluted FWD NM 20.29% NM -5.82% NM NM EPS Diluted 3 Year CAGR NM -20.81% NM NM NM NM Tang Book Value 3 Year CAGR NM 24.16% -24.83% -31.79% NM NM Total Assets 3 Year CAGR 29.56% 13.98% 6.47% -18.44% 2.55% -21.89% Levered FCF 3 Year CAGR NM NM -13.47% -2.68% 138.16% NM Click to enlarge Source: Seeking Alpha Analysis: Nerdy’s growth metrics are positive, with significant revenue growth expected. However, its EBITDA and net income growth need improvement. The company’s forward-looking growth potential looks promising, but it must translate this into profitability. Table 3: Profitability Profitability NRDY LINC APEI CHGG VSTA DAO Gross Profit Margin 70.26% 57.58% 51.86% 73.68% 64.00% 50.68% EBIT Margin -28.78% 1.94% 5.23% -1.60% 10.67% -4.28% EBITDA Margin -28.02% 4.09% 9.39% 11.16% 22.44% -3.81% Net Income Margin -14.49% 6.57% -6.78% 2.07% -3.84% -5.93% Levered FCF Margin 0.21% -3.65% 4.06% 18.44% 11.44% -5.46% Return on Equity -65.16% 17.28% -13.00% 1.48% -1.28% NM Return on Assets -46.13% 2.78% -9.40% -0.30% 1.43% – Return on Total Capital -47.29% 1.76% 3.78% -0.37% 1.80% NM Cash From Operations -10.00M 10.84M 53.50M 226.36M 49.13M -61.73M Revenue Per Employee 386.80K 184.42K 142.48K 232.49K 152.28K 173.99K Net Income Per Employee -57,378.00 12,630.24 -9,734.28 4,730.28 -6,462.16 -10,572.75 Asset Turnover 1.57 1.24 1.03 0.34 0.21 3.56 Click to enlarge Source: Seeking Alpha Analysis: Nerdy’s profitability metrics are concerning, with negative margins and returns on equity and assets. The company needs to improve operational efficiency and profitability to be competitive with peers. Key Risks to the Long Thesis The reason I am rating Nerdy’s stock as a hold is due to the risks I see. Here is the breakdown of the key risks that could derail the long thesis Intense Competition: Nerdy faces significant competition from both traditional education providers and other online learning platforms, including Chegg and Coursera. The competitive landscape could pressure Nerdy’s market share and profitability. High Marketing and Sales Expenses: Nerdy’s aggressive investment in sales and marketing to acquire and retain customers might not yield the desired returns, impacting profitability. Technological Advancements: Rapid technological changes require continuous innovation and investment in the platform, which could strain resources. Regulatory Risks: Changes in educational regulations and policies could affect Nerdy’s operations, particularly as it serves a large number of K-12 institutions. Dependence on Institutional Clients: The Institutional segment’s growth is promising, but it relies on contracts with educational institutions, which can be subject to budget cuts and policy changes. Economic Uncertainty: Economic downturns could reduce consumer spending on educational services, affecting Nerdy’s revenue and profitability. Conclusion Nerdy is at a pivotal point as it leverages its platform to tap into the growing online education market. While the company shows strong revenue growth potential, it must address its profitability challenges to create long-term value. CEO Charles Cohn stated in the Q1 2024 earnings call, “We are focused on driving growth in both our Consumer and Institutional businesses, ensuring our platform meets the evolving needs of learners and educators alike.” This focus on growth and innovation is promising, but a Hold recommendation is prudent until Nerdy demonstrates sustained profitability improvements.