2U, Inc., Chegg, Inc., and K12 Inc.: Initiation of Research Coverage

Tuesday, August 13, 2019

William Blair & Company issued a comprehensive report on education technology and initiated coverage of three companies participating in this area: 2U, Inc. (TWOU $14.47), Chegg, Inc. (CHGG $44.99, and K12 Inc. (LRN $28.71). Analyst Stephen Sheldon also assumed coverage of Instructure, Inc. (INST $39.49).

In his report, Sheldon wrote, “The education industry has been slow to adopt technology solutions, but it appears to have hit an inflection point over the past few years. We believe there are significant and growing opportunities for edtech companies, and the education system will likely require innovative techniques to handle needed increases in both the quality and throughput of learning outcomes. In addition, we believe that the education system will likely need to refine its view of quality over time—beyond past focal points like standardized testing. While difficult to define, various estimates indicate that digital adoption in education remains in the low single digits. However, edtech spending is growing rapidly, with many estimating that spend will increase in the mid- to high teens annually over the next few years. Among other factors, we believe this reflects growing demand for online learning.”

Sheldon enumerated specific pain points in the education industry, and discussed solutions from each newly covered education technology provider that are helping alleviate some of these highly complex issues.

“K12 is the largest provider of online primary and secondary schools in the United States,” Sheldon said, “with an estimated one-third of online K-12 program market share. Its size allows it to invest more into its technology platform, provide better content tailored for online delivery, focus on student outcomes, and drive cost leverage. K12 is also deploying career readiness programs, which most frequently prepare students to go directly into the workforce or enter two-year universities, with elective courses targeted toward post-graduation careers.”

While K12 addresses primary and secondary schools, Sheldon noted that 2U is focused on higher education. “An online program management provider, 2U helps universities launch online programs mainly under revenue-sharing arrangements. The company provides the up-front capital and supporting solutions, while its university partners retain control over faculty, content, and admissions decisions. In addition, 2U has expanded into short courses and boot camps. We believe this should: 1) allow 2U to provide more ‘life-long learning’ options; 2) further ingrain 2U with university partners; and 3) be a starting point for 2U to establish more enterprise/corporate relationships.”

Chegg has also historically focused on U.S. undergraduate students. “Chegg’s direct-to-student platform provides learning efficiency,” Sheldon explained. “Its main product, Chegg Study, provides expert answers, detailed textbook solutions, and video content to assist in the learning process. However, the company is expanding its solutions to include 1) solutions for high school students, especially in math and writing, often under a freemium model; 2) tutoring solutions, either subscription or on a per-minute basis; 3) more vertical-specific content, such as the content launch for nursing and business law in 2018; and 4) using its strong data assets.”

Finally, Instructure is one of the largest providers of learning management systems and related solutions. Sheldon stated, “Instructure has meaningful market share in the education industry with its Canvas offering for both K-12 and higher education, and a small but slowly growing presence in corporate learning with its Bridge product. We believe that Instructure spends a lot of time with its clients, particularly in education, to determine their broader needs, and appears to steer its product development efforts toward the bigger and most consistent pain points for customers.”

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