Nerdy (NRDY 6.15%) disappointed a lot of investors after it went public by merging with a special purpose acquisition company (SPAC) in September 2021. The online tutoring marketplace's stock opened at $10.96 on the first day. It closed at its all-time high of $12.28 the following day, but now trades at less than $3.
Nerdy's core platform is Varsity Tutors, a freelance marketplace which connects private tutors to students for online classes. It also hosts live K-12, professional, and adult learning classes in thousands of subjects.
The company's revenue only rose 15% in 2020 as the closures of schools and testing centers during the pandemic lockdowns curbed its growth. Its revenue grew 35% in 2021 as the pandemic's worst point passed, but rose a mere 16% in 2022 as it transitioned from a la carte classes to an unlimited subscription-based model. Analysts expect its revenue to rise 18% to $193 million this year as its business stabilizes.
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Nerdy's growth rates look decent, but they broadly missed its pre-merger target for generating $267 million in revenue in 2023. The rise of ChatGPT and other generative AI platforms also raised troubling questions regarding the sustainability of the online tutoring market.
As Nerdy's growth cooled, its net loss widened from $4 million in 2021 to $35 million in 2022, and analysts expected an even wider loss of $49 million this year.
That mix of broken promises, existential challenges, and red ink drove away the bulls, and its stock now trades at about 1 times next year's sales. Nerdy's stock certainly looks cheap, but I believe investors should forget this struggling company and consider buying Duolingo (DUOL 3.64%) as a streamlined online learning play instead.
A simpler and higher-growth business model
Duolingo owns the most downloaded online learning app in the world. It provides online courses for more than 40 languages, a stand-alone English proficiency test, and newer apps for learning phonics, math, and music.
The company carved its niche by gamifying the learning experience with gems and rewards, and it locked in users with a freemium model that provides ad-free access and additional perks to its paid users.
Duolingo's business model is simpler than Nerdy's because it doesn't facilitate transactions between tutors and online students. Its platform is easier to scale because classes are essentially mobile games, and it doesn't need to split any of its revenue with human tutors.
Duolingo also isn't threatened by generative AI platforms because they aren't used to set up structured language lessons yet. Instead, Duolingo plans to use generative AI to accelerate its development of new courses.
Duolingo's revenue soared 128% in 2020 as the pandemic drove people to stay at home and take more online language classes. Its revenue rose 55% in 2021, even as the pandemic's height passed and its app was suspended in China (but reinstated last June), then grew another 46% in 2022. It expects its revenue to rise 42% to 43% in 2023.
Duolingo ended its latest quarter with 83.1 million monthly active users, which represented 47% growth from a year earlier. Its total number of paid subscribers rose 60% to 5.8 million. Nerdy only served 39,500 active members in its latest quarter.
Duolingo's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned positive in 2022. It also turned profitable on a generally accepted accounting principles (GAAP) basis in the first nine months of 2023, and analysts expect it to post its first full-year net profit for the whole year. Nerdy's adjusted EBITDA is expected to remain negative this year.
Duolingo deserves its higher valuation
At 12 times next year's sales, Duolingo might initially look a lot pricier than Nerdy. But its simpler business model, superior revenue growth, higher margins, and ability to profit from the generative AI boom rather than be disrupted by it all justify that premium valuation.
Duolingo's stock might remain volatile in this choppy market, but I believe it has a lot more upside potential than Nerdy and other struggling online education stocks.
