Three education tech stocks the coronavirus is helping

The Coronavirus will fuel three megatrends for Australian learning and create opportunity for investors who position for the coming revolution in education technology (EdTech).

Trend one is remote learning. It has been a long time coming, but most university students are now studying entirely online. Melbourne kids will probably do most of this school year online.

Like so much other technological change, COVID has condensed years of change in online learning into months, giving educators and students a crash course in this area.

Greater investment in education technology is the second trend. Organisations will need to increase spending on their online-learning systems to improve the e-learning experience.

COVID showed schools and universities were unprepared for full online learning.  By now it should have been an easy transition, but many educational institutions had to adapt on the go with e-learning. Thank goodness for their hardworking teachers. 

The third trend is micro-credentials. COVID-related job losses will spark a rethink in learning systems. Many people will need new skills to get work in another industry. Short-form, “just-in-time” learning – a change the Federal Government supports – is needed.

Yes, remote learning, online learning and micro-credentials are not new. Some universities have successfully delivered courses online for years.

But why did so many schools not have a robust e-learning platform in the event that their campus was suddenly closed? Surely that threat must have been high on their risk register?

Why do some universities still deliver most courses in face-to-face settings, using the Internet to deliver course materials (which is different to providing immersive e-learning experiences?)

Why do corporates insist on hiring graduates who have a combined degree, even though years of study are not needed to do the job and micro-credentials are more efficient?

My point: COVID-19 has shown the education sector – and industry generally – has a long way to go with online learning. That is a powerful tailwind for EdTech providers.

COVID-19, of course, also creates problems for EdTech firms. Selling to schools and universities, never easy, will be even harder during the pandemic. My guess is most schools and cash-strapped universities have far more important priorities than meeting an emerging EdTech provider that wants to sells the latest Software-As-a-Service (SaaS) tool.

Investing in education

Unlike the United States, Australia has never had many education stocks. Not-for-profit institutions dominate our education sector and private providers find it hard to break in.

Two I favoured, Navitas (taken over in 2019) and IDP Education, starred.

There have been disasters: notably, vocational-education stocks that collapsed after a spate of industry scandals. Other micro-cap education stocks have consistently languished.

The emergence of EdTech stocks on ASX is providing investors with much-needed exposure to the sector. It is early days. EdTech is a minnow compared to financial technology (FinTech). Most EdTech stocks are micro-caps that suit experienced, risk-tolerant investors.

Australia reportedly has more than 350 privately owned EdTech companies. Expect some of them to join ASX through an Initial Public Offering as they develop enough scale to list.

Those already listed on ASX include 3P Learning (3PL), Janison Education Group (JAN), ReadyTech Holdings (RDY), OpenLearning (OLL), ReadCloud (RCL), Schrole Group (SCL), iCollege (ICT), Family Zone Cyber Safety (FZO) and TALI Digital (TD1).

Here are three EdTech stocks on my radar:

1. 3P Learning(3PL)

The provider of online numeracy, literacy and science learning programs used to be among my favourite micro-cap stocks. But 3PL disappointed for so long that I gave up on it.

Management changes, challenges of selling into the US, and disappointing earnings hampered 3PL. After floating at $2.50 a share in 2014, it hit 60 cents at the peak of the COVID share market crash in March. It has since rallied to $1.06.

For all the obstacles, 3PL has exceptional intellectual property through its Reading Eggs program and Mathletics, which it distributes. News in June that 3PL signed a US$10-million deal to provide Mathletics licences in the Middle East boosted the stock.

3PL’s educational software is “sticky”, once schools use it they tend to keep it, providing high-margin, recurring revenue. 

I suspect more parents who are worried about their children’s education during COVID will, separately, subscribe for Mathletics or Reading Eggs to boost the learning.

3PL reports its full-year earnings on Friday (August 14). It could be a case of the stock rallying into the news and selling on the fact. I expect 3PL to highlight in its upcoming full-year result the difficulties of selling to schools during COVID-19.

3PL has finally built a scalable operating model, strengthened its product offering and developed a global sales platform. There will be no quick turnaround, but the company is poised to deliver on its potential.

Any sell-off after the full-year result would be a buying opportunity. 

Chart 1: 3P Learning

Source: ASX

2. Janison Education Group (JAN)

I wrote a positive piece on Janison, a provider of digital learning and assessment solutions, for the Switzer Report in August 2019 at 28 cents a share.

Janison soared to 50 cents in early January 2020, but like many micro-caps was hammered during the COVID-19 crash in March. The stock now trades at 38 cents.

To recap, Janison Learning sells customised online learning platforms for companies and helps them manage compliance obligations around training.

Janison Insights helps organisations centralise, streamline and digitise assessments. Some of Australia’s largest state government departments and companies use Janison products.

As more university students learn from home, digital exam delivery will grow. Janison’s acquisition in May of Educational Assessments (a division of UNSW Global) was smart.

Educational Assessments services around 7,000 schools, giving Janison deeper reach into Australian schools and presumably opportunities to cross-sell other products. The former’s ICAS skills-based competition is used from school years 2-12.

Janison said in April: “The recent events experienced globally as a result of COVID-19 have forced educational institutions and professional associations to accelerate their plans to digitise course material and exam delivery. In the long term, Janison is positioned well to benefit from this dramatic and most likely permanent shift in the market…”

That comment is consistent with my thinking on this issue. More students studying from home means much higher demand globally for digitised course material, and for online distribution of protected (supervised) material. Janison is superbly leveraged to this trend.

Janison’s FY20 result, released this week, acknowledged that COVID and related social distancing rules are causing a deferral of in-person exams and other uncertainty.

The result was reasonable given COVID challenges. There is short-term pain as educators delay exams, but long-term gain as schools digitise more learning and assessment in coming years.  

Chart 2: Janison Education Group

Source: ASX

3. ReadyTechHoldings (RDY)

ReadyTech joined ASX last year through a $50 million float at $1.51 a share. I wrote favourably about the company in this report in August 2019 at $1.74.

ReadyTech rallied to $2.24 in early 2020, before slumping to 96 cents during the March sell-off. It now trades at $1.52, having moved sideways for the past few months.

The SaaS education provider helps customers comply with regulatory and legislative reporting obligations, manage large numbers of students and manage payrolls. Many universities and TAFEs use ReadyTech software for student administration.

ReadyTech has low exposure to the collapsing international student segment, which accounts for only 3 per cent of total students serviced by the company’s Student Management Systems.

I like the company’s prospects in the corporate sector. COVID-related disruption will increase demand for ReadyTech software that helps companies navigate compliance-rule changes  that affect awards, annualised salaries, JobKeeper payments and other changes.

More will be known when ReadyTech reports its full-year earnings later this month. Like for many companies, COVID-19 will distort the earnings performance and complicate any guidance.

ReadyTech has been around a long time, is well run, has strong technology an excellent footprint in the compliance and administration software market.

A COVID certainty is more rules and regulations for business in coming years, and more compliance challenges for educators and industry generally.

Chart 3: ReadyTech Holdings

Source: ASX