Imagine you held one of the first iPhones in your hands in 2007. With incredible insight into the future, you concluded that the smartphone would take over the world. Bravely backing your view, you decided to invest a sizable amount in this megatrend.

If you had chosen Apple, you would be wealthy today. If you had chosen BlackBerry, you would be flipping burgers while the Apple investor waits quietly at the table for the food to arrive.

Investing in the right megatrend gives practically unbeatable returns, but within an industry you still have to pick the winners. The fight for dominance in a new or high-growth industry is brutal and funded by deep pools of capital. It’s not often that several players emerge with sustainable profits.

It’s too early to be sure about which global education businesses will dominate that industry over the next decade, but it’s an industry that needs to be considered for any portfolio.

EdTech as the global enabler of this megatrend

During the worst of lockdown, the World Economic Forum estimated that 1.2 billion children were at home instead of at school. That’s a lot of kids who were suddenly thrust into an online education pilot project that nobody asked for.

It certainly raises questions about the future of education.

EdTech as an industry refers to the hardware and software used to enhance teacher-led learning. I would expand this to include any learning because tertiary studies and perhaps even final year senior phase studies may not need teachers in years to come. At least not in the traditional sense.

Tertiary level: a journey of lifelong learning

In a new report entitled Future of Humans, UBS makes the following observation:

“Education will no longer end with the attainment of a diploma or a certificate. It will become an ongoing process—through training at work, formal learning later in life, and even the educational mer­its of social media.”

A requirement for lifelong learning isn’t a matter of debate. Jobs have become less physical and less menial, which means:

  • Most people are either unable financially or simply unwilling to retire at 65, preferring to stay intellectually active and involved in economic activities well beyond that age
  • University level education is no longer a guarantee of success and cannot be relied upon to secure a career spanning half a century
  • Machine learning and automation are forcing people to reinvent themselves and develop new skills on an ongoing basis
  • Investment in artificial intelligence (AI) will accelerate (a great recent example is NVIDIA’s plans for AI research in England as part of the $40m acquisition of ARM)

The world has changed. There’s a shift in how we learn, what we learn and where we learn. Like many other trends, Covid-19 simply accelerated the shift.

For example, JSE-listed tertiary education business Stadio gives us interesting data points in the most recent financial results, although they must be interpreted with caution.

Over the past 3 years, Stadio’s on-campus and distance learning student numbers grew at similar rates (10% and 9% respectively). For the first half of 2020 vs. the first half of 2019 though, on-campus grew just 3% and distance learning grew 12%.

Before lockdown, it appears as though on-campus learning at Stadio was growing faster than online. Both sets of numbers would’ve been impacted by the timing of acquisitions though, so I wouldn’t read too much into that.

In the first half of 2020, distance learning grew faster than on-campus, which is to be expected during lockdown. Interestingly though, it grew at a faster rate than in prior years, suggesting increased interest in acquiring new skills. This makes sense during a time of retrenchments.

There are lots of once-offs in this data making it tricky to draw meaningful conclusions, but the question we need to ask is: will the online growth trend stick?

Personally, I think that it will. As skills become more specialised, people will be more likely to invest in acquiring a specific skill that will improve their earning potential, rather than incurring significant student debt to attend on-campus lectures for a few years.

There will always be demand for on-campus learning and the social element to this, but investing is about looking for growth and I believe the growth will be in distance learning.

School level: a hybrid model may emerge

This is where it gets a lot trickier.

At foundation phase levels, it’s not obvious that electronic methods will be effective in teaching basic numeracy and literacy. Early childhood development will be aided by technology, but I cannot see the classroom environment being disintermediated by technology entirely.

In older phases however, there are key questions that I believe can be asked:

  • Can schools transform from places of teaching to venues that facilitate online learning instead?
  • Can disintermediation of schools create a perfectly competitive market for teachers where top teachers with verifiable results become high-earning professionals, like lawyers / doctors / bankers?
  • Can the gap between private and public school education quality be closed through online learning?
  • What will the ethical concerns be around data privacy of students vs. the value of benchmarking students or social networking through educational platforms?

Phase I in this journey was the introduction of iPads in the classroom. Phase II was the proliferation of software. Phase III may well be the replacement of traditional schooling with online learning platforms.

Teaching is a notoriously low-earning profession. It’s not impossible to envisage a world where technological disruption allows teachers to charge more for their services, accessing students anywhere in the country.

It also means parents can pay more for top-rated teachers in subjects where the child struggles vs. less experienced (and cheaper) teachers in subjects where the child is finding things easier. Imagine if you could build your child’s teacher base the same way a football manager builds a team to a specific budget.

Crazy? I’m not so sure.

How do you invest in this megatrend?

The first decision is whether you want to invest locally in school groups like Curro and AdvTech, or tertiary groups like Stadio, or international EdTech businesses listed on exchanges like the Nasdaq.

Although not listed yet, BYJU’s is an example of an EdTech business that is generating huge amounts of investor interest. The company has over 70 million registered students and 4.5 million annual paid subscriptions since India went under lockdown. BYJU’s is now the second most valuable Indian startup, boasting a valuation of $11.1 billion.

BYJU’s has attracted $1.6 billion in overall funding across 16 funding rounds since its launch.

The challenge is that unlisted companies cannot be directly accessed by the average investor. Only large venture capital institutions can get access to these deals. The rest of us have to wait for an IPO or seek out existing listed investment opportunities.

Personally, I am not invested in traditional school groups. I never believed the ridiculously high multiples that people tried to apply to Curro a few years ago. A local tertiary group like Stadio is more interesting, but I still prefer tapping into international growth when focusing on megatrends.

An international EdTech Index does exist, so perhaps an index tracker product available to South Africans isn’t too far away.

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