Many American students enjoy a break from their studies during Spring Break in April. Investors, it seems, decided to take a hiatus from Udemy (UDMY -2.77%) then, too, as they traded out of the stock to leave it with an almost 12% loss in price over the month. Let’s explore the reasons why, and whether the decline leaves the education company attractively priced.
A new C-suite appointment and analyst downgrade
Udemy didn’t exactly pull into April on a high note. In mid-March, the company somewhat unexpectedly replaced its CEO Greg Brown with Hugo Sarrazin, a tech executive who did a 26-year stint at consultancy McKinsey & Company. Sudden transitions at the top have a way of unnerving shareholders, so sentiment was already a bit wobbly when April Fool’s Day rolled around.
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This wasn’t helped by an analyst downgrade that hit the headlines less than a week later. Truist Securities analyst Terry Tillman changed his recommendation to hold from the preceding buy. He also enacted a 30% cut to his price target, reducing it to $7 per share from $10.
According to reports, Tillman pointed out one major concern investors had (and continue to have) about Udemy — as an education company targeting adult learners, it falls into the non-discretionary consumer goods category.
Just now, there is a growing fear of economic recession, caused by factors such as the Trump administration’s patchily aggressive set of tariffs. In recessions, people typically pull back on non-discretionary spending.
Tillman also expressed concern with the CEO change, in addition to the company’s exposure to large enterprise and international clients. He lowered his revenue estimates accordingly and added that the company is now fairly priced despite its outwardly attractive valuations. In the analyst’s view, there are better, cheaply valued stock buys that carry less risk.
Meeting expectations
Udemy finished April by reporting its first-quarter results on the last day of the month.
This drove the stock price down a bit more, even though non-GAAP (adjusted) net income more than tripled year over year to nearly $17.9 million. Investors might have been more focused on the top line, which only ticked up by 2% year over year (to slightly more than $200 million).
They might also have been unimpressed that the two line items only notched slight beats on analyst estimates, or that current (second) quarter and full-year guidance was broadly in line with pundit expectations.
I don’t think Udemy is a bad stock, but even at the current reduced valuation, it doesn’t feel like a potential big winner. That recession-induced slowdown that some fear is a real possibility, too.
Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
