October 20, 2020

Zovio: Well-Diversified Educational Business Poised For Growth (NASDAQ:ZVO)

Zovio (NASDAQ:ZVO) is an education technology services company that owns several different revenue streams, whether it be working with college institutions or operating an online tutoring platform. The stock has performed quite well and is up 89% YTD, but we believe there is considerable room for growth given its business model and a recent deal with the University of Arizona.

(Zovio – Seeking Alpha Financial Chart, 2020)

The sale of Zovio’s Ashford University is an opportunity to reach a global audience and expand customer segments

In early August, Zovio transferred Ashford University’s assets to the University of Arizona in a rather complex agreement, where Ashford will be renamed to the University of Arizona Global Campus and operate as an online university. Zovio will run the “strategic services” for this new university, which includes “recruiting, financial aid, counselling, institutional support, informational technology, and academic support services (Zovio 10-Q, 2020).”

The University of Arizona will cover direct costs of operations, and provide 19.5% of total tuition and fees revenue for approximately the next seven years. $440M in tuition and fees revenue for this new global campus seems to be the benchmark for the coming years, therefore a 19.5% revenue slice is equal to approximately 88 million dollars per year. Again, Zovio would earn this sum of money without having to pay for any operational costs.

We believe this is a fantastic opportunity given that Zovio has already had the expertise in terms of recruiting students to their online university, but Zovio can use The University of Arizona’s brand and reputation to further target international students, and young students fresh out of high school. Zovio will have a much easier time recruiting international students, and their main selling point can be the fact that these students can earn a degree from anywhere in the world from a credible university in the United Staes. Currently, 35% of Ashford University’s total enrolment is related to Education Partnerships, where employers provide opportunities to employees to pursue a college degree (Zovio 10-Q, 2020). We fully expect enrollment numbers of fresh high school graduates to increase over the next few years, and Zovio anticipates “the velocity of new enrollments from [Education Partnerships progam] to be contingent to moderate in coming quarters (Zovio 10-Q, 2020).”

Some may worry that the first batch of costs that companies would cut out of a budget during a pandemic would be educational programs, but Zovio states that “this trend has stabilized in recent weeks, with some partners even re-instating their programs (Zovio 10-Q, 2020).” We believe that on top of attracting traditional students to the new university, Zovio can work with previous corporate partners and incentivize them to re-install the partnership or target new companies under the fresh new brand.

Zovio’s acquisitions of FullStack Academy and TutorMe.com should continue to strive during the pandemic.

Before anything, it is great to note that Zovio’s “assessment through the second quarter of 2020 has not resulted in any impairment of its goodwill or indefinite-lived intangibles (Zovio 10-Q, 2020).” The sum of these two accounts is around $41 million and mainly consists of the immeasurable values from the acquisitions of FullStack Academy and TutorMe.com.

(FullStack Academy, 2020)

According to its website, FullStack Academy is “the top coding boot camp in New York” and also has a campus in Chicago. Currently, the company is hosting all classes online at the current moment.

We believe that alternative education paths such as coding boot camps are seeing an increase in enrolment numbers given that unlike traditional universities, boot camps such as FullStack allow for tuition payments after their students find full-time jobs. This deferred tuition model allows students to avoid hefty student debt and provides individuals with the opportunity to potentially start a well-respected career within half a year.

We believe that there are two main reasons why FullStack Academy will continue to strive in the coming years. Firstly, students who would usually go to university and get a four-year degree are there mainly because of the priceless “college experience.” Due to the pandemic, the campus experience has changed drastically, and since college schooling is online for the time being, the four-year experience just isn’t the same.

The second reason is that since the value of the ‘college experience’ has changed, students are reluctant to pay crazy tuition fees for online school. The average cost of attending Harvard is over $200,000, whereas the FullStack’s tuition prices are less than 10% of that. We are not arguing that FullStack provides a better experience than Harvard, but students may perceive FullStack to be more valuable given that the FullStack certificate can be earned in such a short time, and students don’t need to go into crazy debt.

Many may argue that once this pandemic is over, more students will return to traditional campuses, but we believe that over the next few years, coding boot camps can gain significant reputation and credibility by demonstrating a strong track record of their students getting jobs, and continuously improving the learning experience. By the time college classes resume the prestige and perception of boot camps will have changed.

(TutorMe Website, 2020)

TutorMe.com is another subsidiary owned by Zovio and is poised to gain traction during the pandemic. TutorMe’s business model is a peer-to-peer tutoring platform that could potentially grow exponentially.

During the pandemic, we believe that both demands for tutors and tutees are rising. On one side, lots of students are simply not receiving the support they otherwise would at university. Usually, they can physically visit office hours of their professors or teaching assistants or form study groups, but all that is partially restricted online. Moreover, the nature of online school doesn’t allow for seamless connections between classmates, therefore students may find themselves in situations where they cannot lean on a classmate for homework or testing help. On the other side, side gigs are on the rise as university students are looking for ways to support tuition payments as they may have lost their campus job or part-time job due to COVID-19. TutorMe hosts live and on-demand tutoring, and provides services for all major college subjects.

One aspect that stands out about TutorMe is that the site actually vets their tutors. According to their website, only 4% of applicants will eventually end up on the platform. This peer-to-peer business model is highly scalable as there are low variable costs – and as more quality tutors come onto the platform, more struggling students will look towards TutorMe for help.

Zovio is in a comfortable position financially and we wouldn’t be surprised to see another acquisition

Zovio’s NTM P/E ratio is 15.3x and has an EV/EBITDA of 5.20. Moreover, Zovio’s current ratio is about 1.4x and its Altman Z-Score has remained unchanged since Pre-COVID figures at about 3.9. As of the end of Q2, the company has about $75M in cash, their accounts payable and other liabilities accounts. The company only has about $2.8M in long-term debt. Therefore, we do not believe there is bankruptcy risk in the near future and its valuation is fair.

(Zovio Financial Analysis – Koyfin, 2020)

The company has seen a steady improvement in operating income figures over the last few quarters, and is slowly decreasing SG&A costs. SG&A will be an important account to monitor over the next few years, since the University of Arizona will cover strategic services costs for Zovio, there could be a substantial increase in operating income in the near future.

We believe that the company will continue to seek out acquisition opportunities in the near future, given the rapid digital educational trends in the last few months, especially in the K12 space. It would be interesting for Zovio to explore services outside of their current revenue streams as they are mainly exposed to college students.

Zovio operates in a highly competitive space

There is no doubt that the partnership with the University of Arizona poses a significant risk, as the enrollment of new students may not be as seamless as originally thought, and the Education Partnership programs with companies could see slow growth in the near future due to budget corporate cuts as a result of the pandemic.

Moreover, Zovio’s two main subsidiaries operate in highly competitive spaces. There are no shortages of online coding boot camps out there, and unless FullStack Academy can secure partnerships with blue-chip technology companies and send students directly to these corporations, it is tough to differentiate from other boot camps with quality learning experiences. TutorMe is also competing with the likes of Chegg (NYSE:CHGG), Course Hero (CRSH), and many more sites that offer comparable services. The peer-to-peer platform has some great features, but there is nothing proprietary about their business model.

In summation, we still believe there is upside with Zovio considering the two smart acquisitions the company made in 2019, as well as the strategic partnership with a notable university just last month.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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