The 2019/2020 school year is over, and summer vacation has arrived. Instead of kicking back and enjoying it, however, many students (and their parents) are wondering: Will colleges reopen in the fall?
Let me put you at ease on that point: Even with coronavirus still stalking the campus, by all accounts college will resume in the fall. "Some classes will be held in person, others online and still others in hybrid fashion," reports The Washington Post, but most schools will at least attempt to open back up.
This means, of course, that we now have to resume thinking about how to pay for college for our kids -- and on that score, I can't help but wonder if one of the answers might be staring us in the face.
After all, the 2020 school year ended with most if not all college students completing their classes remotely, with help from e-learning tools. The 2020/2021 school year, too, sounds like it's going to lean heavily on e-learning. Could it be that, when seeking out investments to help grow our kids' college funds, we should be focusing our efforts on stocks that benefit from the e-learning trend?
Zoom Video Communications
Unless you've been living under a rock the past three months, chances are good you've heard of Zoom. From December 2019 to the height of the pandemic in April 2019, daily users of Zoom's videoconferencing tool "zoomed" from 10 million to 300 million.
Granted, many of these users were folks telecommuting to the office while locked down under government-mandated stay-at-home orders. Others were quarantined folks going stir crazy and engaging in video happy hours to pass the time. But many of these users were students, utilizing meetings for online schooling. In fact, Zoom got so popular with schools so quickly (and so noticeably to Zoom management) that the company rolled out an entire "School Administrator's Guide to Rolling Out Zoom" for student use.
Basically, "thanks" to COVID-19, Zoom got itself a crash course in how to tailor its product to online education. In the coming school year, and school years to come, I'd be very surprised if Zoom doesn't capitalize on that experience and move to dominate the e-learning market with its product. Indeed, if Zoom hopes to satisfy analyst expectations for its business to grow earnings at a compound annual rate of 55% per year over the next five years, it's going to have to do exactly this, and grow strongly in every market it can -- education included.
The big knock against Zoom as an investment, of course, is that with a market capitalization of more than $68 billion, but trailing earnings of just $50 million, the stock's P/E ratio of more than 1,360 is expensive. For investors put off by that valuation, I'd suggest Cisco Systems as a reasonable alternative that is both working hard to get schools to use its videoconferencing tools for online schooling -- like Zoom -- and trading for a more reasonable-seeming valuation.
Specifically, a P/E ratio of 18.
To capitalize on the need for remote education products, and at the same time steal away some of the market share that fell into Zoom's lap this past spring, Cisco has been offering schools the option of trying out its Webex Education software (which includes video meetings, video calling, file sharing, and other tools) for free during the pandemic. And Cisco has had some success with that -- namely a 700% increase in usage of Webex by schools and colleges.
The momentum Cisco has gained from the explosion in demand online learning could help shake it out of its doldrums, and accelerate the single-digit earnings growth rates that analysts (still) forecast for the company. At the stock's valuation of just 18x earnings (and according to S&P Global Market Intelligence data, just 13x free cash flow), it wouldn't take a lot of growth to make the stock a solid investment.
If you're looking for an online software play that offers both a more reasonable valuation than Zoom and also a long record of above-average growth rates, though, tech titan Alphabet may be more to your taste.
Alphabet -- better know by the name of its most famous division, Google -- came a bit late to the coronavirus online education party, only making "advanced" Google Hangouts capabilities free for users of its "G Suite for Education" apps earlier this month -- and only through July 1.
Still, there's no reason why Alphabet wouldn't be able to change its mind to capitalize on a longer-lived move to remote learning at colleges, should that be the direction things go this fall. Moreover, Alphabet has a huge library of educational materials already prepared, cataloged, and ready for use by educators within its YouTube subsidiary. It's really a very logical beneficiary of the shift to online education.
Valuation-wise, Alphabet stock sits somewhere between Zoom (expensive) and Cisco (cheap), with a stock trading for 28.4 times trailing earnings -- or just 25.5x earnings when accounting for the significant amount of net cash on its balance sheet. With a 17% projected long-term earnings growth rate, and a good chance of growing even faster (over the past 5 years, Alphabet's growth rate has averaged better than 19%), gigantic Google could actually be the safest bet for a stock that will help pay to send your kids to college.