Morgan Stanley downgraded Udemy Inc. (NASDAQ: UDMY), from “Neutral” to “Underweight”, and reduced the price target from $10 to $7.50, which implies a possible downside of 7% compared to its current price.
This downgrade is due to concerns about Udemy’s strategy shift towards large enterprises amid weaker demand. Prior expectations had been for a near-term increase.
Udemy shares dropped 4.7% in the early morning trading after the announcement. This brought the year-to date decline of the stock to about 45%.
Morgan Stanley analysts claim that Udemy’s profit targets are not in line with its lower growth forecasts.
The company is cautious of the risks that could arise from the pivot in the mid-term due to the weakening web traffic.
Analysts also raise valuation concerns. They note that Udemy is trading at 31% more enterprise value for 2025 than its nearest competitor, Coursera, (NYSE:COUR), in spite of Udemy’s slower growth rate, smaller addressable market size, lower differentiation and higher transactional revenues.
Udemy is trading at 50% more than Coursera based on enterprise value up to 2025.
Udemy execution worries cause analysts to be cautious about Udemy
It isn’t the first time that Udemy analysts have questioned its legitimacy in recent months.
Bank of America lowered its target price to $8.50 in August from $14. This was an 8% drop.
Bank of America expressed concern over missteps in execution, strategic changes and the lack of evidence of stabilization of revenue trends.
Analysts were cautious because of these uncertainties, despite acknowledging Udemy’s potential for benefitting from the secular shift towards skills training – especially in artificial intelligence.
Udemy lowers its 2024 growth guidance due to slowing growth
Udemy’s earnings report for the second quarter of 2024 did not do much to ease these fears. This company’s non-GAAP earnings per share (EPS) of $-0.04 was $0.03 below analyst expectations.
The revenue reached 194.4 million dollars, an increase of 9.1% over the previous year. This was slightly better than consensus expectations by $0.25million.
The company has reduced the revenue forecast for 2024 by a significant amount, marking the second reduction this year. It attributes the decrease to the challenging macroeconomic environment, lower conversion rates on the marketplace, limited budgets of enterprise customers, and the ongoing optimizations in its go-to market strategy.
Both the Consumer and Enterprise Segments are facing challenges, as revealed by fundamental company performance.
The revenue of the consumer segment decreased by 4% on an annual basis to $73.8 millions, and monthly average sales fell by 4% from 1.29 million to 1,29 million.
The first negative quarter-over-quarter performance, and the 10% decline in the last three months, raises concerns over the flywheel effect of Udemy, as a drop in user numbers could result to less instructors and less material, further reducing the engagement of users.
Udemy’s Enterprise (UB) segment grew revenues by 19% over the past year to $120.6 millions, but has experienced a deceleration.
UB’s net dollar-retention rate dropped from 104% down to 101%. The rate for larger customers also fell from 111% up to 108%. UB’s annual recurring revenue also slowed, from 22% growth in the first to only 17% in second quarter.
Udemy announces a $25M savings plan to refocus on larger enterprises
Udemy, in response to this challenge, announced that it would focus its efforts on the large enterprises, with an aim to improve operational efficiency, and to achieve significant margin growth.
The plan is to increase its penetration amongst existing customers and to expand partnerships in order to enhance global distribution.
Udemy announced a restructuring program as part of the initiative. This plan will affect approximately 280 employees worldwide, or about 19%, of Udemy’s total workforce by fiscal year end 2023.
The restructuring will result in annualized savings of 25 million dollars, but it is also expected to incur costs of 16 to 19 million dollars spread over the period from the third quarter 2024 until the first quarter 2025.
Udemy targets an adjusted EBITDA of between $130 and $150 million by the end of 2026. This is up from $26 million expected in 2024.
Udemy is still struggling to meet its profit targets despite these measures.
Udemy valuation stretched due to slow growth and high cost
Comparing the company to its peers, it appears that their valuation is stretched. Udemy is valued at a higher enterprise value-to-sales multiple than Coursera despite its slower growth rate and lower margins.
Stock-based compensation costs of approximately $95,000,000 per year raise further questions regarding earnings quality and possible shareholder dilution.
The current EV/Sales ratio is around 1,04x. This figure, while low at first glance, is similar to other companies in the sector, such as Coursera. It suggests that industry wide multiple compression has occurred due to competition and macroeconomic pressures.
Investors are watching closely to see how fundamental issues could impact Udemy stock prices in the short term.
Investors can make better decisions by gaining valuable insight from technical indicators.
The weakest across all timeframes
Udemy’s shares reached a peak of 32.62 dollars a few months after the company filed for IPO at the end of 2021. Since their low of $6.67 made last month, Udemy shares have experienced a prolonged downtrend.
TradingView
The stock is still weak in all timeframes, despite the recent rebound. Investors who are looking to start a new long position should avoid it until the stock trades above its swing high price of $9.48.
Bearish traders can take a position short on the bounce-back above $8 with a Stop Loss at $9.55. The stock could fall to below $5.8 in coming months if the downward trend continues.
The post Morgan Stanley Downgrades Udemy: Is there more trouble to come? This post Morgan Stanley downgrades Udemy to Underweight: Is there more trouble ahead?
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