This article is proudly sponsored by the Business Ethics Team at the University of Texas at Austin!
About Nerdy
Contrary to what one might initially assume given the name of the company we will be analyzing in this stock analysis article, this article isn’t meant to serve as a de facto autobiography describing our feelings as they relate to economics and finance.
The company’s name really is “Nerdy.”
All kidding aside, Nerdy is one of the primary beneficiaries of ridiculously overpriced education and learning.
In fact, one of our founders knows this to be true as they once had a sort of consultation call with one of the company’s subsidiary’s representatives, who happened to be incredibly nice by the way, so as to emphasize that it wasn’t her fault that Varsity Tutors charges an insane amount of money and also apparently limits the amount of tutoring sessions you can have per month to only one or two or somewhere in that area code all while charging obscenely high rates.
Not only are they limiting the amount of time students have with their designated tutors but they are also charging a leg, an arm and pretty much the entire rest of the body just to work with someone they may or may not gel with.
At least, that’s been his experience.
Nevertheless, that is their business and that is how Varsity’s parent company, Nerdy, makes its money.
We’re not judging, rather we’re just merely offering some insight regarding the up close and personal experience we’ve recently had with the company and its services.
Ultimately, the aforementioned founding partner found a new tutor and didn’t contribute to Nerdy’s total revenues.
Underwhelming experiences aside, let’s work on a small project where we won’t need the aid of overpriced tutors and walk through some of Nerdy’s financials in hopes of figuring out whether or not this stock is worth your time and money.
Nerdy’s stock financials
Right off the bat, we’re grateful to find that it is far less expensive to own a piece of this company than it is to pay for a single tutoring session.
By miles.
Specifically, Nerdy’s (NYSE: NRDY) current stock price is trading at an affordable $2.72 per share and is also accompanied by a market capitalization of $253.6 million as well as a currently unavailable price-to-earnings (P/E) ratio paired with no annual dividend presently being offered to its shareholders.
Frankly, all of this was to be expected, especially the company not having a P/E ratio or an annual dividend available given that their business employs its fair share of artificial intelligence (AI) and other related software and technology and thus is probably burning through troves of cash (we will verify this to be true later in this article), accounting for the fact that Nerdy doesn’t have any earnings to display because it is likely retaining anything and everything it earns from customers and is putting it back behind its business and previously mentioned technologies in order to grow and increase its market share.
This also makes it sensible that the company doesn’t offer its investors an annual dividend given that it would act as an unnecessary total cash drain on the company, especially in its current phase of expansion.
Getting a little more familiar with the company and its financials, let’s stroll over to Nerdy’s balance sheet.
According to TD Ameritrade’s platform, Nerdy’s executive team is in charge of around $177 million in total assets as well as approximately $126.5 million in total liabilities.
Simply put, we’re not the biggest fans of this company’s overall balance sheet structure but at the same time, we sympathize to a certain extent, as there have been a multitude of macro-related headwinds pushing smaller tech companies and their valuations down to alarmingly low levels and simultaneously their total liabilities to unforeseen higher levels.
However, this is still a relatively low amount of total assets and heightened level of total liabilities, and in order to survive and push through the current recession, Nerdy’s executive team will likely be faced with some very difficult decisions and will also be accumulating more debt in the process.
While we’re not in love with Nerdy’s balance sheet at this current juncture, we understand why it is the way it is and we hope to see the company’s leadership make some tough decisions sooner rather than later.
Onto the company’s income statement, Nerdy’s total revenue in 2020 was reported as $0, however the following year it was reported to be nearly $141 million and given the nature of the tutoring and education business as a whole, we think Nerdy’s total revenue will gradually rise each year over the next five or so years given that regardless of the state of the economy, there will always be plenty of students who will need help with their classes and plenty of parents willing to pay top dollar for that help, especially for those who have children in high school that are gearing up to apply to the college of their dreams.
This general notion will act as a major revenue tailwind for Nerdy.
To the last of the big three financial statements, Nerdy’s cash flow statement indicates that we were up the right alley as it relates to the company burning through cash. Specifically, the company reported net income of -$33.3 million and -$30.6 million in 2020 and 2021, respectively.
Truth be told, this isn’t as bad as we thought it would be, but the issue is we don’t really know how much longer Nerdy will burn through that sort of cash, especially given the current uncertainty plaguing the capital markets today.
Additionally, it is our view that this cash burn will accelerate over the next few years to even more elevated levels, at around -$40 million or even -$50 million annually.
All things considered, we’re neutral on the company’s cash flow statement in the sense that if the company’s total revenue continues rising (as we expect it to) and the recession doesn’t deepen to the point that Nerdy simply can’t survive, the current rate of net income burn makes sense, but still adds some risk to the equation.
Nerdy’s stock fundamentals
Something definitely worth noting is Nerdy’s trailing twelve month (TTM) net profit margin, which isn’t nearly as bad as we thought it would be, although it is still negative.
Specifically, Nerdy’s TTM net profit margin is currently perched at -9.62% to the industry’s average of 1.97%.
Prior to drafting this stock analysis article, we assumed that Nerdy’s TTM net profit margin would’ve been somewhere in the realm of -60% given all of the cash burning and technology-related investment and reinvestment required, however we’re happy to find that the company’s net profit margin isn’t all that far off from the competition’s average, especially in such a competitive space.
At the same rate, we were also pleased to find that Nerdy’s TTM returns on assets and investment sing a similar tune, standing relatively close to the competition’s average(s) already, which we like to see as well, especially with younger technology companies, as it is quite rare broadly speaking.
Should you buy Nerdy stock?
Big Education has undoubtedly become Big Business.
Although one of our founding partners didn’t have the best of experiences with the company’s prized subsidiary, that doesn’t mean that thousands or millions of other students won’t use Nerdy and its instructors.
Additionally, some of the numbers behind this company are compelling and as pointed out in paragraphs above, the company conducts its operations in a recession resistant, spare no expense type of industry all while trying to get ahead of the competition through usage of artificial intelligence.
All that to say, this company still has some loose ends to tighten and with the prolonged cost-related headwinds the company is set to face along with the fact that the company’s balance sheet isn’t as asset-heavy as we would’ve liked coming into a deeper recessionary state, we feel most comfortable giving Nerdy’s stock a “hold” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.