The S&P 500 is up 23% this year as we get close to the end of 2023. That’s within striking distance of a new bull market, as the S&P 500 is close to the high it set in December 2021.
It’s no wonder investors are preparing for stocks to skyrocket next year. Inflation is down to 3.1%, and the Federal Reserve hasn’t raised interest rates since July.
A new bull market will bring a surge in prices, but investors shouldn’t get caught up in the frenzy of hyped-up stocks and overlook the fundamentals. Online learning portal Nerdy (NRDY -1.30%) disappointed investors since going public in 2021, but Wall Street sees a bright 2024. Is now the time to buy?
What does Nerdy do?
Nerdy operates an online platform called Varsity Tutors featuring live and recorded classes plus uphold. It offers several packages geared toward individuals, communities, and schools, and it recently shifted from per-class pricing to a subscription setup. The subscription model leads to stronger unit economics, with a recurring revenue stream that drives a higher revenue run rate.
Nerdy works with live tutors who drive its business, but it’s expanding and improving its artificial intelligence (AI) and digital encounter to bolster its classes, resources, and services. In September, overall non-tutoring engagement was up 54% year over year and 68% for new members in their first month. New members increased 40%.
Nerdy is improving its AI-enabled chat system, which is always available. These changes are driving higher engagement from members, and members who engage more have higher lifetime retention metrics. They also drive margin expansion since they don’t come with additional costs for tutors.
The major opportunity is with schools and institutions, which book large contracts for groups of students and come with high financial backing.
Why Nerdy stock has disappointed
Nerdy went public at the height of the special purpose acquisition company (SPAC) craze right before the bear market started. It promptly fell and is now 75% off its first-day closing price.
Revenue has been growing, but modestly, and below expectations. Worse though, it has swung from positive net income to net losses.
Nerdy has been dealing with the educational fallout of COVID-19, which hindered its growth over the past few years. However, it made some progress in the 2023 third quarter, with revenue up 27% year over year, above internal guidance. The major growth is in the institutional business, which increased 133% over last year, and the shift to the subscription model, or what it calls “always-on” learning, aided the higher growth as well. It also contributed to an enhance in gross margin from 69% to 72.4%.
Cash flow is still negative, with an outflow of $4.8 million in the third quarter, although that was an improvement from $13.3 million in 2022. Net losses improved from $32 million to $20 million.
Wall Street was expecting an adjusted net loss per share of $0.12, and Nerdy reported $0.01. However, it came in below expectations for sales.
What to expect from Nerdy stock in 2024
Nerdy stock is up 37% in 2023, and the average consensus on Wall Street is for a 70% gain over the next 12 to 19 months. Out of nine covering analysts, six rate it a buy, and none rate it a sell. (The others are between hold and outperform.) The highest price target is 105% higher than today.
Nerdy operates a growing business that leverages technology to better traditional learning systems, and its shift toward subscriptions and institutions could drive high growth over time. However, it’s still moving around and finding its way forward, as well as posting net losses. I wouldn’t suggest buying it at this stage, but if you have a high risk tolerance, you could follow Wall Street’s direct and take a small position.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
