Description

Aspen Group (NASDAQ: ASPU)

Undiscovered EdTech company with significant upside, driven by multiple expansion and organic growth opportunities

Sector Overview

A sector of the market that continues to witness strong growth is the education market. Building on the theme that the best investment we can make is investing in ourselves, we have seen very strong growth in subs or enrollment for ed tech companies. As you can see in the tables below, these high growth, high visibility education technology businesses are being given 5-10x multiples by the market and have experienced significant growth over the past 5 plus years.

*Denotes FY end April

Several of these companies including Tal Education and Grand Canyon have provided investors with 10x returns over the last 5-7 years as these companies have demonstrated strong growth, which has also led to multiple expansion. Instructure and 2U are currently in the middle of their expansion stage as compounders and Chegg is also re-accelerating its growth.

Aspen Group (NASDAQ: ASPU) What’s the Opportunity?

While the education companies in the table above have impressive growth characteristics and still have room to continue to expand, they have likely already achieved both their peak growth rates and their peak multiples.  Therefore, we have shifted our focus search to identifying the next emerging growth company that has the potential to grow its revenues 10x over the next 5 years and one where we can build a sizeable position BEFORE INSTITUTIONAL CAPITAL is able to own it.  Aspen, Inc. (ASPU), a $138m Enterprise Value, recurring revenue online education company could be the next company that gets added to this small list of growth companies. Similar to other companies mentioned in this article, Aspen has a disruptive ed tech model, which has allowed it to position itself as the low cost operator in the fast growing nursing sector in the education market. As of FY18 Q3, Aspen has an active student body of over 6,000 enrolled students and over 4,400 in its nursing degree programs.

The nursing market is large and growing. There are over 3 million nurses in the United States and according to the Bureau of Labor Statistics, the employment of registered nurses is projected to grow 15-20 percent from 2016 to 2026, which positions nursing as the fastest growing sector in the economy. According to the 2016 America’s Health Rankings Annual Report, the United States (U.S.) ranks 26th of 35 Organization for Economic Co-operation and Development countries for life expectancy (“Comparison With Other Nations | 2016 Annual Report | AHR,” 2016). One reason for the poor health outcomes may be attributed to the nursing shortage issue. (Link: Reuters - Hospital Operator HCA Spends Big To Keep Nurses On Board). Many states are operating with an unsustainable nursing shortage (ANA, 2014; Kaiser Family Foundation, 2016). Additionally, many majority rural states rank with the lowest amount of nurses (HRSA, 2015). By 2020, there will be 1.6 million nursing job openings, 700,000 of which will be newly created jobs (Carnevale, Smith, & Gulish, 2015). (Link: NY Times - Opinion: We Need More Nurses).

Additional factors driving the accelerating demand in nursing are the growth in baby boomers (2.5-3 million people age into the Medicare system each year), a supply demand imbalance between retiring nurses and a need to train new nurses and the demand for more family nurse practitioners.  Additionally, hospitals hoping to earn Magnet status must provide proof of plans to increase their BSN workforce to 80% by 2020, which has been an additional driver of growth.

Aspen differentiates itself by being able to offer industry low tuition rates that are approximately 35%-50% lower than other peer educational institutions. The payment model is structured so that students pay anywhere from $250-$375 per month for their degree programs depending upon which bachelor or graduate degree program they are enrolled. Aspen’s pay as you go model is highly unique to the industry as every other institution we surveyed makes students pay for their education upfront by the semester Given Aspen’s low monthly pay as you go payments, students do not graduate with debt and Aspen University is not heavily dependent upon the federal government to subsidize its students. In fact, historically the majority of for profit universities rely on the government for as much as 85% of the student tuition costs whereas less than 20% of Aspen’s student body receives federal government aid.  

The second distinguishing factor of Aspen’s business model is that its student acquisition cost is only around $875 per student whereas other for profit universities typically spend between  $3600-$5000 to acquire a new student. Historically, the lifetime value of an Aspen student is approximately $7000-$7500 or a 8.5 to 1 return ratio. Now that the university is adding new degree programs at much higher price points (doctoral degree $35,000 and FNP $27K), the LTV should expand even as the SAC for doctoral level students also increases given the degree cost is over 3.5x higher than their BSN and MSN degree programs.  

Lastly, we have been impressed with the focus Aspen has placed on culture and data analytics. As an example Aspen’s graduation rate is approximately 62%, 11% higher than the national average. As part of our due diligence in meeting with the company, it became clear that retention is a very strong focus at Aspen and will be at USU as well. Faculty advisors are in place to coach and counsel students and administrators monitor online class attendance and performance so if students struggle, the university can hopefully pick up on the early warning signs.

ASPU Leadership

Aspen is led by CEO and founder, Mike Mathews.  His background resides in Internet marketing after he successfully built Interclick into a leading online advertising network that was acquired by Yahoo for $270m in 2011. Because Aspen has vertically-integrated marketing and operates like an ad network (working with publishers directly) placing all ads utilizing their own brands, and by benefitting from referrals and other successful marketing tactics such as direct outreach to hospitals (the company already has 90 corporate partnerships in place with hospitals), the company has an unprecedented lead conversion rate of around 13%.   Aspen’s marketing efficiency therefore  allows the company to offer incredibly low tuition rates and still generate a robust SAC (student acquisition cost) to LTV (lifetime value) that is better than any SAAS or direct to consumer subscription business we have ever analyzed. We believe that the company’s front end student acquisition engine is worth over $250m today in stand alone value and that the company could leverage its proprietary knowledge and process across multiple industries. For example, if you look across other several successful billion dollar plus direct to consumer companies such as Netflix, Match.com, Dollar Shave Club, LinkedIn, Soul Cycle, Wayfair, Cimpress and Gaia these companies are converting less than 3% of their leads and most of these companies have CAC to LTV ratios between 3-5x and high customer churn rates. When you compare Aspen to other best in class direct to consumer businesses, it becomes more clear that Aspen has created a BEST IN CLASS customer acquisition model. As part of our due diligence, we contacted enrollment advisors from other education companies who told us that the leads they receive are generic, not highly customized and they are purchased from third party lead generation companies. Additionally, they said their models are all based on high volume cold calling. It is no wonder that that the turnover of enrollment advisors at these institutions is high as well as the cost to acquire students. Aspen recruits enrollment advsiors from the industry and not surprisingly, their attrition is extremely low.

Given that the company is adding new, higher priced degree programs now that it has acquired regionally-accredited United States University, the company’s LTV should meaningfully accelerate over time as these new programs ramp students. These students may cost 30-40% more to acquire, but the LTV is more than 100% higher on these new FNP and doctoral programs.  More impressively, Aspen’s corporate partners have made Aspen’s degree programs even more affordable and attainable given the corporate sponsor’s willingness to often help cover a portion of the tuition. Oftentimes, Aspen’s students end up going to school for next to no cost and get as much as a 15%-60% increase in salary depending on the degree they graduate with.

ASPU and Industry Growth Rates

In terms of the business, the company grew over 65% in FY17 and is expected to grow over 50% to 21m in FY18, which ends in April. Revenue is expected to ramp to over 75% growth in FY19 and enrollments to ramp to over 70%.  The company reached breakeven at $14m in revenue and then management made the decision in the fall of 2017 to invest for growth and capture more market share given the strong industry dynamics and the company’s lower cost and more flexible tuition model. In addition, the company announced the acquisition of United States University in the fall of 2017, which came with only roughly $3m of revenue, but it brought with it regional accreditation that will allow it to extend its online reach nationally and offer more degree programs beyond nursing as it looks to enroll more students. The company had to front load marketing, administrative and teaching costs at USU so investors have yet to see the revenue ramp from the USU initiative.  The Family Nurse Practitioner 2 year degree program is one degree that management has discussed on recent earnings calls that we expect will ramp aggressively in the back half of FY2019. The degree cost is $27K and is paid monthly. There are over 234,000 family nurse practitioners in the U.S. today alone and the market is adding over 25,000 new FNP’s per year and the growth is expected to accelerate. (Link: AANP Press Release). USU’s FNP program is the lowest cost FNP program in the country. Therefore, it is not unreasonable to think that with time, the program could enroll over 1250 students per year.   

By 2024, the Bureau of Labor Statistics projects that the NP profession will have grown by 35% compared to 30% for physician assistants and 13% for physicians.  If Aspen were to capture 5% of the FNP market that would imply that they would enroll over 1,250 new students per year or over 100 new FNP’s per month. Once Aspen has ramped its call center and marketing programs, capturing 5% of this market is actually quite conservative when you consider that Aspen has the most flexible and lowest cost program in the country and it converts a staggering 13% of its leads. Now that Aspen is adding an outside salesforce to feed leads to its call center of 60 plus agents and growing, its enrollment growth should only accelerate further. In fact, if you read the company’s public earnings call transcripts, the company plans to add another 15-20 reps by May 2018 and is also increasing its marketing spend from its initial $150,000 per month to almost $600,000 per month.

In addition, we expect USU to add additional degree programs over the next 12-18 months in Technology including specialization degrees in data analytics, web development, cyber security, software development, robotics, AI and IT as well as degree programs in Psychology. Psychology is another degree program where there is a shortage of practitioners and accelerating demand where USU could fill a great need in the market. Link: Washington Post - Why It's So Hard To Find A Mental Health Professional. Today there are  27,000 annual master degree graduates and growing.

By the end of CY2018, the company could have close to 100 enrollment advisors (almost double from a year prior) and given that average rep is adding 7-8 students a month that equates to a run rate of roughly 8400 new students per year.

Today there are over 5 million students online and the numbers continue to accelerate. Below is a table of the universities with the largest on-line programs and their costs relative to Aspen. Given the cost of Aspen’s degree programs are significantly lower and the company has a much lower fixed cost operating model, we are confident that Aspen and USU will be able to ramp their enrollments.

*Chamberlain is exclusively nursing and the majority of enrollment is in pre-licensure

Pre-licensure Nursing Degree Program

Another longer term program that will drive growth for Aspen is its newly announced undergraduate, pre-licensure BSN nursing degree program. The company announced in February that it will open its first campus in the greater Phoenix area.  This announcement is significant in that the pre-licensure market is 4x-5x greater than the post licensure market. While the ramp of the first campus will be gradual, the campus will be able to accommodate up to 900 students and at peak capacity could potentially generate $12-15m in annual revenue. Overtime, there is nothing preventing Aspen from being able to open 10-15 campuses.  For example, the Chamberlain School of Nursing (owned by Adtalem Education) has more than 10,000 enrolled students with students paying over $85,000 for the pre-licensure program. Aspen’s pre-licensure program is priced at approximately $46,000 for the 3 year degree. Today, Chamberlain generates over $300 million in annual revenues.

Now that Aspen is offering both pre-licensure and post licensure nursing degree programs, we believe that over time, the company will be able to scale to over $300m in revenue from its nursing programs alone. When you consider that USU intends to expand into other educational verticals including Psychology, Technology, Business and Education and the Military VA, etc., one gains increasing confidence that Aspen certainly has the potential to increase 10x or more in value if the company executes well.

Recent events and Stock Sentiment

At the end of April, Aspen raised $23m in a secondary equity offering at $7.15. the The capital raise was a positive for the company as it enabled Aspen to retire the $7.5m of debt on its balance sheet and enabled the company to increase the cash on its balance sheet to $15m. This cash position is now significantly large to allow the company to aggressively pursue it new initiatives and should remove what has been an overhang on the stock.   The other overhang on Aspen’s stock has been that the company’s expenses have accelerated as they have hired additional faculty, administrators and enrollment advisors to support the launch of new programs at USU and the launch of their first pre-licensure campus. Investors are waiting to see the corresponding revenue ramp from these initiatives. However, as noted in the recent secondary prospectus, Aspen pre-announced 28% sequential revenue growth in its current FY18 Q4. (Q3 $5.7M, Q4 $7.2m) The upwardly revised quarterly guidance had ONLY called for 17% sequential growth. This growth clearly demonstrates that the USU programs are gaining traction and seeing strong enrollment especially in the FNP program, which has still not been fully rolled out.

Why should you own ASPU?

Our view is as follows: the company raised revenue guidance coming out of its most recent quarter and just announced revenue numbers meaningfully above Q4 street expectations, so we think the risk is to the upside not to the downside in the company’s ability to start accelerating its revenue ramp over the next several quarters.  Secondly, as the company now begins FY2019 the valuation becomes extremely compelling and should serve as a catalyst for buyers to step in. If one waits for certainty in the results and sell side to get more bullish, investors will have to pay up significantly to chase an illiquid growth stock. Lastly, the company should reach break even in the back half of FY2019, which will serve as another catalyst for investors.

We also believe that overtime, Aspen is going to be viewed more like a direct to consumer on-line subscription Internet marketing company thay has an education product than as a brick and mortar education company.  A good comparable company to Aspen is Gaia Inc. Gaia is a high growth Internet subscription content company. The company has a $300m market cap (that is also illiquid) and recently raised $41m in a secondary offering at over 6x CY2018 sales. Gaia in contrast to Aspen has a CAC to LTV ratio of 3-3.5x and has a lead conversion rate of less than 2%. Below is a list of public direct to consumer Internet companies and as one can see, Aspen compares very favorably. In addition, Lynda.com, an online subscription education course company was acquired by LinkedIn for $1.5B or 8.5x sales in 2015, which we believe is another good comp for Aspen’s business. We believe over time investors will value Aspen among other Internet subscription product businesses.

*DollarShaveclub was acquired in 2017 for approximately 7x sales

Summary

If you don’t have market cap and liquidity constraints to contend with, the opportunity to buy Aspen would be now because the data shows that stock multiples expand as the liquidity improves and institutional ownership rises, which ultimately drives these growth stocks higher.

The company has just completed its FY18  and estimates are for $21 million in revenue. Aspen is well positioned to grow its revenue 9-10x over the next 5 years, a feat very few public companies are in a position to do. Our estimates have the company growing revenue from 21m in FY18, 41m in FY19, 65m in FY20, 105m FY21, 155m FY22, 215m FY23. As the company executes on its growth plan and achieves scale, we expect the stock to trade at 5-6x sales (a multiple afforded larger growth companies.)  

While the company could be highly profitable today if it chose to given its extremely low student acquisition costs ($875 per student), the company has chosen to accelerate its market share gains and invest for growth given its huge competitive cost advantage. We think this decision is smart and will enable the company to create exponentially more value for shareholders over time. Keep in mind that Aspen has been EBITDA profitable historically and reached profitability on only $14m of revenue, which highlights how much operating leverage exists in this business.  Longer-term, we believe the company can generate 25% EBITDA margins once the company achieves $150-$200m in revenue.

Catalyst

- Acceleration in revenue growth 

- New degree programs ramping at USU have 2-3x higher ARPU 

- New sell side coverage