Money Talks: EdTech is flying under the radar
Money Talks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to see what’s hot, their top picks and what they’re looking out for.
Today, we hear from Harley Grosser, CEO, CIO and founder of Capital H Management.
2019 has been a particularly strong year for the technology sector fuelled largely by buy now, pay later (BNPL) stocks like Afterpay (ASX:APT) which have delivered huge returns for investors.
Afterpay shares have rocketed 185 per cent this year and Capital H’s Grosser is now focusing on another division of the tech space he thinks could have similar potential – EdTech.
“The EdTech space is really no different to any other space that’s digitising,“ Grosser says.
“The big advantage though is that, while the education sector generally has been slow to evolve, when it does move, it moves very quickly and the contracts can be very large, significant and sticky.”
For international schools, the rise of middle class in developing nations like China is also opening up opportunities for EdTech companies.
“The effect of this on international schools alone has opened up a $40 million market opportunity for companies that are involved in creating quality curriculum and the staff that teach that curriculum,” Grosser says.
There are some intricacies to the EdTech sector, Grosser says, and understanding them is the key to picking the right stock to back.
“You need to understand the cash flow cycle and the timing of when sales happen,” he says.
“It’s a bit different in EdTech because, while business can win new clients at any time of the year, there are peaks that coincide with the school season and you have to understand that and how the cash flow cycles through.
“Recruitment tends to happen at the start of the school season or even a little earlier, from September to December, and that is also when product contracts are usually signed too.”
Schrole Group (ASX: SCL)
Market Cap: $15m
While, at the larger end of the market, companies like Sequoia-backed executive education company Eruditis are edging close to unicorn status, Grosser is honing in on small caps like education recruitment and training platform Schrole Group (ASX: SCL), which Capital H has a solid stake in.
“Schrole is somewhere between a mini-Facebook and mini-Seek,” Grosser says.
“It’s carved out a leading position in its little niche and has plenty of potential to run a lot higher.”
Schrole has five product and service divisions, through which it is able to connect schools with high-quality teachers and staff, and has a low-cost base, meaning its margins are attractive.
Grosser says the economic attraction of Schrole’s platform is clear.
“Schrole’s tech pays for itself after just one or two successful hires which means that schools using recruiters can also justify using Schrole,” he said.
Stellar September quarter earnings saw Schrole’s shares rocket nearly 30 per cent, but Grosser reckons it’s still undervalued.
“The number of international teaching roles globally has soared over the last 20 years and the pressure on schools to recruit means platforms like Schrole’s are going to become absolute necessities,” he says.
“It will provide tailwinds for many years to come.”
Read Cloud (ASX: RCL)
Market Cap: $33m
E-learning platform Read Cloud sells cloud software to schools for storing digital books. The Australian company has contracts with more than 250 Australian schools and reported a 129 per cent increase in customer schools this year.
“Some of these groups of schools can be quite large and have large contract values so there can be big wins,” Grosser says.
“Once you start to win over a few schools and others start to follow it can be very lucrative.
“Read Cloud has similar revenue and growth bases to Schrole so it’s interesting to note that their market caps are quite different.”