We came across a bullish thesis on Nerdy, Inc. (NRDY) on Value Degen’s Substack by Unemployed Value Degen. In this article, we will summarize the bulls’ thesis on NRDY. NRDY Technologies, Inc. share was trading at $1 as of Sept 20th.
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Nerdy, Inc. a founder-led company operates in a hot market sector such as Education, despite its ongoing dilution of equity it is a compelling investment opportunity for investors because its scalable business model creates a significant potential upside. Nerdy with its flagship brand, Varsity Tutors, is an online learning platform that provides live tutoring services for a wide range of educational needs, right from elementary school to college prep and career readiness. The platform includes 24/7 chat tutoring, test prep, enrichment classes, personalized learning, and more. Nerdy operates in two segments one where it mimics Uber’s model where it connects students with live tutors categorized as Retail (Direct-to-Consumer) and the other categorized as Institutional (School Districts) which is partnership-based, where it aims to integrate its services with school districts providing resources for students and families making it easier for them to hire a tutor.
Nerdy’s institutional segment aims to combine its tutoring resources into the educational system at no cost to students or families in 20% of U.S. School districts. It has made significant strides towards this goal by establishing partnerships with 500 school districts. These 500 school districts use Varsity Tutors for Schools to supplement learning, improve accessibility, and bridge learning gaps. One of its recently established contracts was with North Hills School District giving its students free access to Varsity Tutors for Schools until 2030.
Nerdy’s topline has been historically growing 22% annually with a gross profit margin of 70% which is more than its general and administrative expenses indicating a highly profitable business. Though the company has been in the red it is only because of its marketing expenses. Assuming revenue continues to grow at 22%, and SG&A remains flat as it has since 2021, Nerdy could achieve positive net income by 2026. Nerdy has $70 million in cash, no debt, and is currently burning cash, giving it approximately three years to reach cash flow breakeven or profitability. If this level of growth continues, net income could exceed $100 million by 2028.
Founder, Chairman, and CEO Charles Cohn has invested around $13 million recently increasing his ownership stake from 20% to 30% (see the transactions). Cohn’s behavior signals confidence in the company’s long-term strategy and success, which stands out since many founders cash out once they achieve financial success. Nerdy seems to be severely undervalued given its current share price as a similar company Sylvan Learning, with 500 franchise locations, was sold for $181 million, while Nerdy is valued at $188 million, despite already being integrated with 500 school districts. With $300 million expected revenue by 2026 at the current growth rate, Nerdy could be worth $1.8 billion, assuming small-cap tech valuations recover to pre-2022 multiples (6x-8x sales for software companies).
Despite Nerdy being a high-risk investment due to ongoing dilution, the need to hit growth targets within a tight cash flow timeline and being in a tutoring business that has seasonal fluctuations, with slower results in Q2 and Q3 due to the summer break. We can expect a 10x increase in the company’s current valuation but one must believe that Nerdy’s institutional initiatives will accelerate growth and the founder’s confidence and management’s enthusiasm about client responses are positive signs. A small, cautious position is recommended due to the inherent risks.
Nerdy, Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 14 hedge fund portfolios held NRDY at the end of the second quarter which was 17 in the previous quarter. While we acknowledge the risk and potential of NRDY as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NRDY but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.