It May Be A Good Time To Invest In This High-Quality Edtech Stock As It Pulls Back

PowerSchool's shares have underperformed other edtech stocks in 2023, and several analysts see that as an opportunity.

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As a result of PowerSchool's mixed fourth-quarter results, the company's shares closed down about 2.1% in Thursday's trading session. Despite this, analysts have largely reiterated their ratings on the stock and raised their price targets for the stock. In accordance with FactSet, most analysts rate the stock as a buy or overweight, with an average price target of $26.75, which implies roughly a 16% increase in value from Thursday's close.

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“PWSC has remained steadfast in its ability to grow revenue organically in the low double-digit range as well as to improve its margins on a regular basis over the years. As it has a sizable install base to which it can cross-sell its large product portfolio, as well as minimal churn has given the stickiness of its products, we see this dynamic continuing for multiple years to come," wrote Brett Knoblauch, an analyst at Cantor Fitzgerald, in a research note.

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It has been reported that PowerSchool's net loss widened to $3.2 million, or 2 cents a share, compared to a loss of $15.9 million, or 8 cents a share, in the fourth quarter of last year. Based on non-GAAP measures, the company earned a non-GAAP profit of 27 cents per share, exceeding expectations that it would earn 20 cents.

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Refinitiv analysts surveyed expected $162.6 million in revenue, but the company generated $161.1 million.

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Knoblauch has raised his price target for the stock to $27 from $21, saying that the underperformance the stock has shown so far this year can be viewed as an opportunity. There was a wide margin between PowerSchool's stock performance and that of its edtech peers last year. In 2022, the company's shares gained 40%, but they have fallen nearly 1% year-to-date, lagging both its peers as well as the market as a whole.

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The fact that there is such widespread concern over inflation and the potential for a slowdown in the economy makes that seem surprising.

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“What's great about our industry is that there is a lot of resilience in it, and what we sell is mission critical,” said Hardeep Gulati, CEO of Trade Algo, in an interview with Trade Algo on Thursday.

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A significant driving force behind PowerSchool's growth has been the increase in school budgets, which have shown resilience to recessions in the recent past.

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Covid funding could boost spending

Based on Knoblauch's calculations, about 6% of the gross domestic product will be spent on education in the year 2019. Earlier this year, in a research note on the sector, he noted that investors have lost sight of the importance of this fact as a result of the underperformance the group has been experiencing. As a result, he preferred the shares of Udemy and Coursera over those of PowerSchool.

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There is also further support in the U.S. provided by billions in funding that were allocated to school districts in order to close the gaps that occurred as a result of the learning loss that occurred during the Covid pandemic. It is imperative that these funds are allocated or spent by the year 2024, or they will be lost.

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It has been estimated that over 55% of the ESSER II funding still remains to be spent, so this could provide an extra cushion for school districts and states to be able to handle some of the initiatives that they want to continue.

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A portion of PowerSchool's strategy has been to sell additional products to districts where it already has a foothold in the market.

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“Historically, Jefferies analysts have highlighted PWSC's saturation at the district level given they already reach 80% or more of all K-12 students in the United States and Canada," Brent Thill, an analyst with Jefferies, said in a recent research note. "However, PWSC's continued strength in [nonrecurring revenue] indicates that the company can continue to cross-sell to its existing customer base in order to drive a 10%+ growth rate in the coming years."

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Many districts are only using two of the company's 20 products, according to Gulati. In his opinion, cross-selling has the potential to be a $3 billion opportunity for the company in the near future.

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“In North America, there is a lot of potential for us to continue to grow double digits in the future,” he said. "The international market is actually even bigger than the domestic market."

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The international opportunity

The international expansion of PowerSchool is still in its infancy, according to Thill, and it is one of the reasons he is positive about the stock going forward. As a result, he said, the stock valuation is "getting full" at the moment as a result of recent market activity.

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As part of the company's earnings report, PowerSchool announced a partnership with OneConnect which will allow the company to expand its operations in Africa. There are PowerSchool partners in India, the Philippines, and Uruguay that have a presence in these countries. Furthermore, PowerSchool plans to open an office in Dubai as part of its growth strategy in the Middle East region.

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Gulati points out that in some parts of the world, Covid has been even more disruptive to learning than it has been in the U.S., and that countries are looking to regain the ground they have lost by bringing up their own version of Covid. During the next three to five years, he anticipates that international business will become a $200 billion business.

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“In fact, our products are already localized and proven in 90 countries, so we already do business in them," he explained. “Having scaled up that growth, we are now looking to scale it up even further.”

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The potential for both of these opportunities was cited by Credit Suisse analyst Rich Hilliker earlier this month when he cited PowerSchool as one of his firm's top picks.

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Upon reviewing PowerSchool's earnings, Hilliker commented, “Steady execution, increasing demand velocity, greater multi-product adoption, and diligent cost management led to a sense that PowerSchool's platform is resonating and that the flywheel is spinning in the right direction.” Our particular interest is in the company's cloud bundles based on personas and its potential for international expansion. There is a strong likelihood of continued, profitable growth ahead based on recent results and guidance."

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More M&A ahead

After reaching the long-term net leverage target, Cantor Fitzgerald's Knoblauch predicts PowerSchool will begin to allocate more cash to mergers and acquisitions now that it has reached its long-term net leverage target.

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As Gulati points out, "acquisitions definitely give us the opportunity to grow in the coming years.". “It goes without saying that we do have a fairly comprehensive and complete platform, but there are always opportunities for acquisitions to enhance our technology footprint, expand into additional adjacent markets, and expand internationally. So, we definitely have a lot of prospects and opportunities in that area, and we will continue to look for acquisitions in that area."

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Historically, PowerSchool has focused on areas with the greatest market demand.

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"Post-Covid, students were having difficulty with social-emotional aspects," he said, pointing to the Kickboard acquisition as an example of how it addressed that need. The acquisition of Kinvolved by PowerSchool is another example of addressing attendance interventions by the company was also mentioned by him.

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“In order to ensure that we can address the key market needs for K-12 districts quickly,” Gulati said.