Thread by @jstoffer

1/ TLDR @udemy S-1. A future education giant is building an immensely promising, albeit still sub-scale, enterprise business off the back of a mediocre consumer marketplace. ringingthebell.substack.com/p/udemy-s-1

2/ In today’s labor market, employers will increasingly turn to @udemy, @coursera, @skillshare, and @pluralsight to upskill their workforce and provide educational benefits to employees. COVID greatly accelerated this trend.

3/ @udemy began in 2010 as a consumer marketplace business enabling anyone to sell a course in any subject. Today, the marketplace has 183,000 courses and serves more than 44 million users globally.

4/ The core @udemy consumer marketplace is a slow growth line of business. After seeing a nice and unsustainable COVID bump, it grew only 9.3% YoY in 1H 2021. It’s hard to make money selling one-off courses at $11.99 for ~53% gross margins.

5/ At the same time, COVID has created two pressing macro needs for businesses. First is to retain current employees, and we are seeing an explosion of benefits thrown at employees as a result. Second is the need to upskill your employee base given the difficulty of hiring.

6/ And the corporate learning market is huge, pegged by @udemy at $71 billion.

7/ In an act of jujitsu, @udemy leveraged its core consumer assets to build Udemy Business. Look at the growth since 2019. This reminds me of what @jakeschwartz did @ga, using the power of a strong-but-hard-to-differentiate consumer brand to build an enterprise business.

8/ The knock on @udemy has always been uneven course quality. For enterprise, it takes top instructors and tightly curates the best 6,000+ high quality courses from the 183K on the platform. It also prepares users for certifications and offers enterprise administrative tools.

9/ From a business model standpoint, the consumer business has ~52% gross margins with a straight revenue share with instructors. It’s not clear, but my guess is there's a Spotify usage type of model with the B2B business, yielding rich 65% gross margins, with upside from here.

10/ The growth in ARR in Udemy Business is straight up impressive. $182M as of Q2 (+80.1% YoY). Plus 123% net revenue retention in 1H 2021. I want more data on (1) customer retention in addition to revenue retention; (2) LTV:CAC + payback period for enterprise customers.

11/ Udemy Business is still a small share of wallet for customers. @udemy has 42 of the Fortune 100 as customers amongst their 8,600 total customers. Even if the Fortune 100 is 50% of @udemy revenue, that is still only ~$2M per customer. That’s really just a Beta test.

12/ Given how much money companies are throwing against benefits in today’s tight labor market, I am short to medium term very bullish on @udemy. The dollars are falling from the sky and @udemy is there to pick them up.

13/ In the long term, @udemy will need to show real results. Can an employee with quant skills learn data science? Can one with creative instincts learn graphic design? Can @udemy teach skills more effectively than competitors @coursera @pluralsight @asuonline, @snhu @2uInc?

14/ @udemy should be valued as a sum of the parts. The consumer business should do ~$350M this year. Maybe it gets valued like other slow growth consumer businesses like Verizon: so call it ~3x revenue or $1 billion in enterprise value.

15/ The bulk of @udemy value is in Udemy Business. Comparables here include HR SaaS businesses like Paycor (~17x TTM Sales), Ceridian (22x), Workday (15x) or Paycom (34x). Say it is a 20x current ARR, placing Udemy Business at $3.6B in value.

16/ Adding up the consumer and business value gets us to $4.6B, which is slightly ahead of the IPO range of $4B, and it should get there with a small pop. If you just lazily apply Coursera’s 10.8x TTM revenue multiple to @udemy, it’s worth $5.2B.

17/ Last but not least, I want to send a huge congratulations to my Wharton classmate and friend Sarah Blanchard, who is Udemy’s CFO. I’ll be cheering for Udemy and Sarah as they strive to meet what I see as huge upside potential.