Online learning platform Udemy (UDMY -0.10%) went public in October 2021 at $29 per share. Since this initial public offering (IPO), it's been a terrible stock to own -- down 47% from its IPO price whereas the S&P 500 is up roughly 1% during this time.
Not only is Udemy an IPO stock that's down, but it's also operating under the radar. For evidence, consider that only 740,000 shares have traded hands per day on average over the past three months, according to Yahoo Finance. This is a relatively low trading volume for a company as big as Udemy and suggests most investors simply look at it with indifference.
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I'm not an indifferent onlooker of this company. Udemy is a stock I'm watching with extreme interest. And if the company continues to grow one specific part of its business in 2022, I'll buy shares in a heartbeat. Allow me to explain why.
What is Udemy?
Udemy is an online marketplace for education. There are other public education companies like 2U and Coursera. But I believe Udemy has a competitive advantage when it comes to educational content creation. Whereas the aforementioned companies gravitate toward university partnerships and accredited professors, anyone can create a course on Udemy.
At first glance, this might look like the bear case for Udemy. After all, the company is flinging the door wide open to anyone, which could allow poor-quality content and instructors inside. This is almost certainly true. Consider that there are currently over 175,000 courses taught by over 60,000 instructors on Udemy's platform. It's highly likely at least some of these are subpar offerings.
However, Udemy is a marketplace business. Marketplaces benefit from flywheels. In this case, more courses can attract more students and vice versa.
The primary challenge is to get the flywheel spinning in the first place. However, with over 175,000 courses, it's highly likely students can at least find something of value on Udemy's platform. And more students will motivate more high-quality professors to create additional educational content.
Therefore, by lowering the barrier of entry for content creation, Udemy jump-started its flywheel. And it's working. Consider that in 2017, there were just 10 million learners using Udemy. Fast forward to the third quarter of 2021, and there's over 46 million.
Udemy's consumer business generated $79.2 million in revenue in Q3, down 13% year over year. But for context, revenue was up 77% last year, boosted by consumers looking to acquire new skills during the pandemic lockdowns. So the revenue took a slight dip this year, but overall growth is still strong on a two-year basis.
However, Udemy's consumer business is not what I'm most interested in as an investor. The company also has an enterprise segment called Udemy Business. And Udemy Business could make this a multi-bagger investment.
Image source: Getty Images.
Why Udemy stock could be a strong investment
Businesses can subscribe to Udemy and provide courses to employees. It seems that companies aren't as concerned with accreditation as much as they care about employees having a skill. For evidence, consider that over 9,500 companies already subscribe to Udemy Business, including 42 companies in the Fortune 100. If Udemy Business can keep growing in 2022, I'll buy shares in a heartbeat.
Don't misunderstand: Udemy's consumer business is strong. It generated revenue of $329 million over the past 12 months. However, these sales are unpredictable. Needs for continuing education fluctuate for a single individual. I might need to learn a skill this year, not next.
By contrast, businesses should always have a need to train their workforces in new skills year in and year out. This is Udemy's opportunity. As mentioned, it has over 9,500 enterprise customers in Q3, which was up 42% year over year. And not only is the customer growth impressive, but customers are also spending more over time. In Q3, Udemy's net dollar retention rate was 118%, suggesting Udemy Business' customers are sticking around and finding a reason to spend more on the platform over time.
Moreover, Udemy Business still has relatively few customers, leaving a large growth opportunity.
Looking at valuation, Udemy Business is now generating $207 million in annual recurring revenue, up 80% year over year. Considering the stock's entire market capitalization is just $2.1 billion as of this writing, it's currently trading at just 10 times sales from Udemy Business. And this doesn't even include Udemy's consumer business. Therefore, I'd say investors are getting Udemy Business at a fair price and getting the consumer business for free.
As a final aside, I'm also looking for Udemy to hit its Q4 revenue guidance of $130 million to $134 million. It's important for IPO stocks to establish track records of credibility early on in their public histories, and Udemy is no exception.
