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E-learning takes off
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January 26, 2001: 2:02 p.m. ET
At $3.5B and growing, Wall Street sees online ed market as potentially viable
By Bridget Eklund
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SAN FRANCISCO (Red Herring) - Wall Street's opinion about electronic education is that the sector has at least progressed from a concept to a competitive industry, with companies vying for market share. Merrill Lynch estimates the e-learning market at $3.5 billion today, and forecasts growth to more than $25 billion in 2003. That figure represents huge potential, but equally huge optimism -- especially considering the pummeling the sector has taken in past months.
"Investors want to see profitability now," said Jeffrey Silber, a senior vice president at Gerard Klauer Mattison & Co., an investment research firm. "Not two years from now."
Nevertheless, they'll have to wait. E-learning remains a fledging sector composed of dozens of startups -- each with its own twist on delivery and content.
Phoenix rising
There are now about 15 pure-play public companies, of which only one, the University of Phoenix Online (UOPX: Research, Estimates) -- a tracking stock of the Apollo (APOL: Research, Estimates) -- is currently profitable. The University of Phoenix, which went public in September, was a pioneer in delivering higher-education degrees over the Internet. Its stock now trades at $38.38 per share, or 89 times earnings estimates for fiscal 2002, leading some analysts to speculate that perhaps it is now overvalued.
 "Higher education has been viewed as a safe haven for investors," said Gary Merwitz, an analyst at Morgan Stanley Dean Witter, who rates the stock a Neutral. "And [University of Phoenix] is trading at the higher end of the valuation range." He also mentions eCollege (ECLG: Research, Estimates) as one to watch, but he doesn't rate the company, which has been gaining momentum and plans to turn profitable in the fourth quarter of this year. In the K-12 category, analysts have high expectations for Riverdeep (RVDP: Research, Estimates), which announced a revenue increase of 186 percent for its fiscal first quarter, ending last September.
E-learning stocks skidded in the latter half of 2000, in tandem with the overall slide in the market. In the last six months, content leaders Digitalthink (DTHK: Research, Estimates), Smartforce (SMTF: Research, Estimates), SkillSoft (SKIL: Research, Estimates), Click2learn.com (CLKS: Research, Estimates), along with infrastructure providers Saba (SABA: Research, Estimates) and Docent (DCNT: Research, Estimates), have experienced, as a group, a 33.6 percent decline in stock value, just ahead of the 29 percent drop in the Nasdaq.
Analysts agree that these companies dominate their sector and remain the most solid e-learning investments, as they continue to sign contracts with big-name customers, stick to execution timetables, and cut back on marketing budgets to focus on quicker profitability. But they've tended at points to trade at a premium.
Flunking the profit test
Investors have turned jittery and are looking for any reason to sell. But analysts say this is a good time to kick the tires of company fundamentals, not shop for deals. "We're looking at companies that are close to making a profit," said Silber. "And there are not too many of those."
Expect consolidation in the industry, as cash-starved companies welcome acquisition or mergers with more established e-learning leaders. But analysts say even the industry leaders face an uncertain future as they strive to meet the all-encompassing demands of customers, who want e-learning to be fast and simple. It's not. The industry's Achilles' heel is getting technology and content to work together in a timely fashion.
 Companies focused on IT training remain the industry's sweet spot. They make up more than half the corporate e-learning market. Analysts call this sector a no-brainer for continued growth, because e-learning fits perfectly with the IT professional's preferred mode of communicating and learning. Along with Smartforce, companies on analysts' radar screens include Learning (LTRE: Research, Estimates) and ITT (ESI: Research, Estimates).
Overall, analysts recommend that when investigating companies investors pick those that can execute rapidly, keep their customers, and remain steadfastly committed to new standards and technologies.
In the end, e-learning won't go away: it saves corporations millions of dollars and helps them keep their work force up to date. As Merwitz said, "Nobody can argue that the demand isn't there."
© 1997-2000 Red Herring Communications. All Rights Reserved. 
© 1997-2000 Red Herring Communications. All Rights Reserved
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