Nerdy: Staying Bullish On Long-Term Potential

Elevator Pitch

Nerdy, Inc. (NYSE:NRDY) shares are still worthy of a Buy investment rating.

My earlier August 22, 2023, write-up was focused on the analysis of NRDY's above-expectations quarterly results, the changes in consensus financial forecasts, and key valuation metrics.

In this latest article, I write about Nerdy's long term top line expansion and profitability improvement potential. NRDY has the potential to achieve a yearly top line of $1 billion and boast annual EBITDA margins in the 25%-30% range. Nerdy's Enterprise Value-to-Revenue of slightly above 1 times doesn't fully capture the company's potential for the long run, so the stock is rated as a Buy.

Long Revenue Growth Runway

NRDY revealed a couple of metrics at the Goldman Sachs (GS) Communacopia & Technology Conference Fireside Chat, the company's most recent investor event, which helps investors to understand more about its growth ceiling.

The trailing twelve months' revenue for Nerdy was $171.6 million (source: S&P Capital IQ). Nerdy believes that the company has the potential to eventually generate $1 billion in top line every year for the future. The $1 billion figure is based on the management's assumption that NRDY can get 0.5% of the 50 million students in the US to subscribe to its learning membership program which costs $350 per month on average.

I am of the view that the $1 billion top line estimate is pretty conservative. A 0.5% market penetration rate doesn't seem to be overly aggressive, and the management has not assumed any subscription rate increases in this $1 billion annual revenue calculation.

Another way to evaluate NRDY's growth potential for the long run is to determine the company's disruption opportunities. At the GS investor event, Nerdy highlighted that there are "1 million to 2 million independent tutors" and "5,000 mom-and-pop tutoring companies," while emphasizing that it is the "only company that's doing live online (education) at scale (3,000+ subjects)."

It will be realistic to expect that NRDY can gain meaningful share from sub-scale individual and corporate competitors in the tutoring or education space going forward, as the industry consolidates and the adoption rate of online learning rises.

As it stands now, the Wall Street analysts see Nerdy's top line expanding by a CAGR of +30.1% from $162.7 million in fiscal 2022 to $606 million for FY 2027, which is still below its $1 billion revenue potential. If NRDY can achieve a higher industry penetration rate or increase its per-member subscription rate, Nerdy's actual revenue growth in the years ahead could exceed expectations.

For example, a larger proportion of monthly memberships (as opposed to annual memberships) as part of NRDY's revenue mix will translate into above-expectations top line growth. Nerdy disclosed at the Goldman Sachs Communacopia & Technology Conference Fireside Chat that it introduced the new monthly membership option (versus the default annual membership plan) in the early part of this year, which has driven "higher average revenue per member per month."

Ample Room For Margin Improvement

Nerdy is guiding for "an adjusted EBITDA loss of $4 million to breakeven" for full-year FY 2023. In contrast, NRDY holds the view that the company can achieve normalized EBITDA margins between 25% and 30% in the medium to long term, as per the management's commentary at the GS Communacopia & Technology Conference Fireside Chat. It is also worth noting that the sell-side analysts' consensus forecasts imply that Nerdy's EBITDA margin might improve significantly to 18.0% (source: S&P Capital IQ) by FY 2027.

The latest numbers suggest that NRDY has been making steady progress in reducing expenses. At the recent GS conference fire chat, Nerdy shared that its General & Administrative or G&A costs-to-sales ratio and sales & marketing expenses-to-revenue metrics improved by +13 percentage points and +11 percentage points, respectively on a YoY basis in the most recent quarter.

Separately, there are levers that Nerdy can pull to increase the overall profitability of the company's learning membership business. One key lever is the addition of high-margin revenue streams. NRDY noted at the recent Goldman Sachs investor event that it has been cross-selling "additive components like content and additional learning formats" which are "additional zero marginal cost products that are very, very scalable and allow for us to have more and more value."

NRDY trades at a consensus forward next twelve months' Enterprise Value-to-Revenue of slightly above 1 times, or 1.09 times (source: S&P Capital IQ) to be exact, even though its consensus FY 2022-2027 revenue CAGR of +30.1% is pretty good. It is clear that the market is penalizing Nerdy for its lack of profitability (EBITDA breakeven at best for FY 2023 as per management guidance). As Nerdy moves towards improved profitability, the stock should command a higher Enterprise Value-to-Revenue multiple in the future. As another point of reference, NRDY's consensus forward FY 2025 EV/EBITDA is an attractive 7.5 times. As per consensus estimates taken from S&P Capital IQ, Nerdy is projected to report an EBITDA of $27 million and achieve an EBITDA margin of 8.4% in FY 2025.

Concluding Thoughts

NRDY's stock price can continue to rise in the future, as the company is in the very early innings of growth considering expectations of its revenue expansion and operating margins for the long run. I think that a Buy rating for Nerdy is warranted.

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