Nerdy: A Small-Cap With Impressive Revenue Growth, Record-Breaking Gross Profit Margins

Nerdy, Inc. (NYSE:NRDY) is a small-cap online tutoring learning platform that has been public since 2021 through an overvalued SPAC deal of $1.7 billion. While the company has been around since 2007, it was really thanks to the COVID-19 pandemic that the business looked into the scalability of its solutions. And if we look at the business’ performance and solutions, it’s really only in the last year that the company has found a successful way of doing this. Due to strategic actions, the company is seeing impressive YoY revenue growth and record-breaking gross profit margins, and its average revenue per member per month has multiplied by three over the last year. Although cautious that the business has yet to break even, investors may want to take a bullish stance on a business with the capabilities to scale and improve its bottom line while doing so. Furthermore, the company is growing its position in a market expected to expand at over 17.13% CAGR between 2023 and 2030.

Company overview

Nerdy is an online tutoring platform that has become increasingly compelling as a business due to the development of its institutional business, giving it the ability to offer high-dosage tutoring on a district, teacher, and parent level by including administrative tools in its platform. Furthermore, the business has transitioned into a more profitable ‘always on’ recurring revenue business model.

Moreover, its investments into AI to increase non-tutoring engagement within its platform are leading to more users and higher revenue per member per month (ARPM). In Q3, learning membership subscriptions increased to 96%, totalling 39,500 learning memberships and $164 million in annualised recurring revenue. Average Revenue per Member per Month (ARPM) of approximately $346 at the end of the third quarter is up from $50.2 million as of September 30, 2022, more than 3X the level a year ago.

AI has added value to its platform in the form of a new My Learning Hub and Subject Portals using AI for content creation, which has allowed for quick and rapid expansion of its resources. Furthermore, its AI tutor chat is available in 100s of subjects, which has majorly improved its operational costs and scaling capabilities.

Financials

The company has seen a significant boost to its top line, gross profit, and operating income, with TTM results indicating three financial years of growth. The company’s revenue is broken down into two categories, namely, its consumer and institutional businesses.

The company offers various subscription options for its consumer business, catering to learners aged 16 and above throughout the academic year. By expanding its product range to a wider audience, the company has managed to increase its revenue. Q3 of 2023 proved to be a strong revenue quarter, with a 19% YoY increase for the consumer business and a 27% YoY increase for the company as a whole. This increase was seasonal and driven by a high number of new memberships (45% increase YoY), in line with the opening of schools in August and September.

For institutional business, its Varsity Tutors for School product, launched in 2021 off the back of the COVID-19 pandemic, increased by 133% YoY to revenue of $5.6. million, with bookings up 89% YoY to $10.6 million. This offering falls under three possibilities: district-assigned, parent-assigned, and teacher-assigned tutoring. Essentially, the company is upselling its consumer product with the addition of administrative tools on a district-wide scale.

Cash position

The company has made significant improvements in its cash flow from operations by shifting to a recurring revenue model. Currently, the levered free cash flow TTM is positive at $5 million. This positive cash flow enables the company to reinvest in its business, reward investors, and pay off any outstanding debts.

The company has no debt and $84.0 million cash on its balance sheet. Management believes that this is sufficiently liquid to reinvest in the business and drive the company’s growth initiatives.

Growth potential and valuation

Nerdy is rated as a D+ on Seeking Alpha’s Quant valuation analysis. The company is still seen as unattractive due to its lack of profits. However, it is expected to see a 32% YoY growth in revenue in Q4 2023, reaching between $54 million and $56 million. For the full year, the company anticipates a 19% growth in revenue, reaching nearly $194 million. The company’s TTM EV/Sales ratio of 1.55 may be considered reasonable for a tech company with a 19% YoY growth in revenue. However, it’s important to note that the ideal EV/Sales ratio varies by industry and company size, and a high ratio may be acceptable for a fast-growing tech company with high profit margins and strong growth prospects, which we are expecting in the upcoming years.

Nerdy expects non-GAAP adjusted EBITDA to be break-even for the fourth quarter of 2023. For the full year, the company expects a non-GAAP adjusted EBITDA loss of approximately $6 million, which is a substantial improvement from the non-GAAP adjusted EBITDA loss of $35.7 million in 2022. The company has also beaten EPS expectations in five of the last six quarters, which can give investors further confidence in its future performances.

Risk

AI is revolutionising the education industry, and Nerdy has incorporated it into its platform. However, AI could pose a significant threat in the long term by lowering the barrier of entry and increasing competition. Additionally, there are already AI-powered tutoring platforms such as Khan Academy’s Khanmigo and Plaito that provide one-on-one tutoring to students without the restrictions and costs associated with human tutors. Nerdy has yet to turn a profit, which could lead to a decline in stock price. Investors should also consider the regulatory risks associated with the online tutoring industry, including data privacy laws and intellectual property laws, which could have a negative impact on Nerdy’s business operations and financial performance.

Final thoughts

Nerdy is a small-cap online tutoring learning platform that has been public since 2021 through an overvalued SPAC deal of $1.7 billion. The company has found a successful way of scaling and monetising its solutions only in the last year, which has led to impressive YoY revenue growth, record-breaking gross profit margins, and a three-fold increase in its average revenue per member per month. Investors may want to take a bullish stance on a business with the capabilities to scale and improve its bottom line while doing so.