hirun
Elevator Pitch
I still rate Nerdy, Inc. (NYSE:NRDY) stock as a Buy. My view is that NRDY’s shares can continue to rise on the back of valuation multiple expansion, which explains why I have chosen to retain a Buy rating for the stock. The company’s full growth potential relating to both its Consumer and Institutional businesses has yet to be completely realized, and this indicates that Nerdy warrants higher valuations.
Favorable Prospects Are Validated By Results Beat And Consensus Estimates Revision
With my prior update for NRDY published on April 20, 2023, I highlighted Nerdy’s favorable prospects for this year in terms of revenue growth acceleration and profitability improvement. Nerdy’s most recent second quarter financial performance and the change in the company’s consensus financial forecasts provide support for my bullish opinion of NRDY’s financial outlook.
Top line growth for Nerdy improved substantially from +4.8% YoY for Q1 2023 to +15.8% YoY in Q2 2023, and NRDY’s actual second quarter revenue of $48.8 million beat the analysts’ consensus sales forecast of $45.9 million by +6.5%. NRDY also turned around from an EBITDA loss of -$9.6 million in Q2 2022 to register a positive EBITDA of +$1.3 million for Q2 2023, which was much better than Wall Street’s consensus EBITDA loss projection of -$1.4 million (source: S&P Capital IQ).
Following NRDY’s Q2 2023 results release on August 8 after trading hours, the sell-side’s key consensus full-year financial estimates for Nerdy have been revised upwards. The market’s consensus fiscal 2023 EBIT loss forecast for NRDY was narrowed from -$57 million prior to the company’s second quarter results announcement to -$53 million now as per S&P Capital IQ data. Similarly, the Wall Street analysts’ consensus FY 2023 GAAP net loss per share estimate was revised from -$0.66 earlier to -$0.56 currently.
There Is Still Room For Valuation Multiple Expansion
Nerdy’s stock price has gone up by +92.4% in 2023 year-to-date, and the company’s shares are up by +89.0% since I initiated on NRDY with a Buy rating as per my October 25, 2022 article. But I view Nerdy’s valuations as undemanding, and I am of the opinion that both NRDY’s Consumer and Institutional businesses still have very strong growth potential.
As per S&P Capital IQ data, Nerdy is currently valued by the market at consensus forward fiscal 2025 Enterprise Value-to-Revenue and normalized P/E multiples of 0.95 times and 27 times, respectively. FY 2025 is expected to be the first year which NRDY achieves positive non-GAAP earnings as per consensus forecasts. It is worthy of note that Nerdy’s consensus top line and EBITDA are projected to expand by CAGRs of +32.8% and +98.2% (source: S&P Capital IQ), respectively for the FY 2024-2027 period. Considering the company’s robust revenue and operating income growth expectations, NRDY is justified to be trading at higher valuation multiples.
NRDY has disclosed a number of metrics at the company’s investor calls, which indicate that Nerdy has a long growth runway ahead.
With regards to its Consumer business, Nerdy noted at the JPMorgan (JPM) Global Technology, Media and Communications Conference Fireside Chat in late May that “revenue LTVs (Lifetime Values) are 50% higher under the new (learning membership) model versus the old (package or transactional) model.” I have previously explained the differences between the two models in detail with my October 25, 2022 initiation article.
At its Q2 2023 earnings briefing on August 8 this year, NRDY mentioned that new client additions for the Consumer business were approximately +35% higher YoY for the June, July and August month-to-date period, thanks to the good response for the new learning membership model. Nerdy also revealed that it is rolling out “a significantly upgraded and enhanced learning membership digital experience that makes it easier for learners to more fully engage with their learning membership” in August as per the company management’s comments at its most recent quarterly results call.
Moving forward, Nerdy expects revenue LTVs for the new membership model to be between two and three times higher (versus +50% higher now as highlighted above) as compared to the old model (source: JPM May 2023 investor conference) in the future, as its Consumer business gains in scale.
When it comes to the company’s Institutional business, NRDY mentioned at its Q2 2023 earnings call that it is still “serving less than 1% of public school students.” Also, Nerdy is currently more of a consumer education company, with its institutional business only accounting for 17% of its Q2 2023 top line. A recent strategic pivot is expected to enable Nerdy’s Institutional business to grab a greater share of its addressable market and grow the segment’s revenue contribution within the company.
Nerdy previously highlighted at the JPM investor event in May 2023 that the company’s Institutional business has recently launched a new “software subscription that entitles teachers throughout a large school district to be able to prescribe tutoring to any student” in the early part of this year. In the past, NRDY’s Institutional business used to focus on schools that were smaller in size which also meant that the quantum of deals wasn’t particularly significant. Now, the Institutional business segment for Nerdy is targeting bigger schools and administrators of school districts as their clients, and this should translate into a faster pace of revenue expansion.
Closing Thoughts
Nerdy’s shares still have legs to run and this justifies a Buy rating for NRDY. NRDY’s valuations are expected to re-rate over time, in tandem with the growth of the company’s Institutional and Consumer businesses.
