The world of education has changed a lot in the last few years. As schools were forced to close by the pandemic, students entered a new world of remote learning and technology. With AI now in the picture, what it means to educate has never been more uncertain. I’ve taken a look at this FTSE 100 company to consider what’s next.
AI vs traditional learning
According to a recent study, more than 55% of students have used AI at some point in the last year. This is only likely to increase as awareness of it and its usefulness grows. Some companies, such as Pearson (LSE:PSON), may see this as a threat to their business if users can research and engage with AI instead of reading a textbook. However, just as society has had to move with the times, so has this £6.6bn giant.
In the midst of the pandemic (and before AI really hit the headlines), the company transitioned from primarily selling textbooks to five distinct segments: Assessment & Qualifications, Virtual Learning, English Language Learning, Higher Education, and Workforce Skills.
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Fundamentals
Despite the challenges posed by the pandemic, the firm has demonstrated remarkable resilience. Through steady revenue streams, and focusing efforts on digital products and services, there’s still a tremendous opportunity for growth.
New CEO Omar Abbosh will likely be encouraged by the strong cash reserves and relatively healthy debt levels. The company recently announced a £300m share buyback programme. The dividend yield of 2.3% is also well covered by the company’s earnings, despite falling a long way from the peak of 7.8% in 2017.
Future growth
Management expect earnings to grow by 16.6% annually over the coming years, roughly in line with competitors. This is a notable jump from the previous five years, when earnings were declining at 19% per year. Cost savings of over £120m likely drove this turnaround.
The business clearly understands the importance of competing in high profit margin areas, such as remote learning and generative AI. Accordingly, the Pearson+ study tools looks to incorporate traditional learning with new interactive tools for several textbooks. It has now exceeded 1m paid subscriptions, with plans to expand AI capabilities to more textbooks in the collection later in 2024.
There’s also clearly a focus on emerging markets, with the English Language segment seeing annual earnings growth of 30% in the latest quarterly earnings. Both present enormous opportunities for the company to expand while innovating in existing markets.
Valuation
I see a lot of hidden potential in education companies able to use AI effectively. As the business redefines itself in these new areas, understanding the fair value of the share price is critical. Based on a discounted cash flow, the current share price could be over 30% undervalued. Similarly, the price-to-earnings (P/E) ratio of 22.7 times is below the sector average at 24.8 times. Growth is never guaranteed, but if the business can execute well, this represents an interesting opportunity for FTSE 100 investors.
What’s next?
AI will definitely play a role in the education of coming generations. As expectations grow, how well FTSE 100 companies incorporate technology into existing products and services will be critical. I see Pearson being in a position to lead the market, but how quickly educational providers and consumers can adjust makes me cautious. I’ll be adding it to my watchlist only for now.
