The Education Technology Sector Offers Several Intriguing Investment Options

Education technology stocks 2U and Chegg offer fast growth without the massive valuations of social media and cloud-software companies.

Apr 7, 2014 at 1:40PM

With the recent IPO of 2U (NASDAQ:TWOU), the education technology sector is grabbing more attention and offering investors more options to invest. Combined with Chegg (NYSE:CHGG), the sector finally has a couple of interesting opportunities in the rapidly growing area.

With every service thinkable moving to the cloud, it only makes sense that higher education involving the most social-media- and technology-savvy generation would be highly involved in online endeavors.

GSV Capital (NASDAQ:GSVC), which invests in pre-IPO venture stocks, is highly invested in education technology. While its Twitter position grabs most of the headlines, the company owns major stakes in both Chegg and 2U. GSV is also heavily invested in several other education stocks that could drive net asset value growth in the future, assuming the valuations in the group perk up.

2U IPO
The 2U IPO struggled out of the gate on March 28, but the stock eventually jumped 7.5% on the opening day. The move doesn't compare favorably to huge gains from other cloud-computing stocks over the last month, but it was a solid showing in the unproven education technology sector.

2U enables colleges and universities to bring their programs online by offering a cloud-based software-as-a-service platform for schools to reach students globally. The University of Southern California, Georgetown University, the University of North Carolina, and a handful of other institutions offer programs through the platform. The company has grown enrollments in clients' programs from 14,099 in 2011 to 31,338 in 2013.

Similar to other cloud-software companies, 2U is producing strong revenue growth while generating large losses. The company estimates that it takes nearly seven months of engaging with a student and spending marketing dollars before the student enrolls, which then generates revenue for an average of two-and-a-half years. On a fully diluted basis, the stock has a valuation of over $600 million, with revenue hitting $83 million last year.

Chegg disappoints
Chegg got its start selling used textbooks at attractive prices to college students. The company is now transitioning to a social hub for students in college and those in high school who plan on attending college. Chegg today obtains over 20% of revenue from digital services including course reviews and online tutoring. For the fourth quarter, digital revenue surged 70% year over year, though the figure only reached $16.7 million.

Chegg is worth around $575 million, with revenue expected to hit $315 million this year and nearly $400 million next year. However, the stock has been a huge disappointment after the IPO was priced at $12.50 and fell to the current price of below $7.

Chegg offers an online educational hub with nearly 7 million student members and 1.1 million course reviews on Chegg.com. The company has made a huge push into future college customers with 7.6 million high school student inquiries. High school students are able to use the service to find the right college and scholarships plus it allows them to pick the right classes prior to stepping on campus. Chegg is also servicing nearly 500,000 Chegg Study subscribers. A subscription provides students with 24/7 expert study help and guided solutions to over 2,500 textbooks.

GSV Capital offers pre-IPO diversification
With GSV Capital stock plunging to $10 after the company reported that the net asset value surged to $14.91 per share at year-end, the stock provides an attractive investment -- especially if investors like the education technology theme. At year-end, its top 10 holdings included several companies focused on education technology: Coursera, 2U, Avenues World Holdings, and Curious.com.

In total, GSV lists education technology as comprising 27.1% of its invested capital, with only social media garnering a larger slice of capital at 34.6%. For investors seeking access to the growing demand for technology-based education, GSV Capital offers a compelling opportunity not only to participate in pre-IPO investments, but to obtain shares at a substantial discount to asset values.

Foolish takeaway
So far, education technology stocks have been a mixed bag in the public markets. 2U might offset the big disappointment of Chegg if it can build on the gains from its first day of trading. So far 2U has seen volatile trading with the weak overall market. For investors not wanting to bet on a particular stock in the sector, GSV Capital offers a compelling valuation and a relatively high concentration of investments in the sector. Either way, education tech is a thriving sector without rich valuations, providing ample opportunities for investors.

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Mark Holder and Stone Fox Capital clients own shares of GSV Capital. The Motley Fool recommends Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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