Udemy cut to Underweight at Morgan Stanley

Investing.com -- In a note to clients on Friday, Morgan Stanley downgraded Udemy from Equal-weight to Underweight, citing concerns over the company's strategic shift and decelerating growth.

The firm also lowered its price target for Udemy from $10.00 to $7.50 per share, reflecting a more cautious outlook on the stock.

Morgan Stanley noted that Udemy's recent pivot could signal weakening demand, as the company faces challenges in maintaining both growth and profitability.

"Growth deceleration to continue due to weak web traffic and consumer conversion to paid, tighter enterprise budgets, macro & impact to GTM from strategic shift," the analysts wrote, highlighting the dual pressures Udemy is facing in both its consumer and enterprise segments.

The firm pointed out that Udemy's new profitability targets, including an ambitious goal of reaching $130-150 million in EBITDA by 2026, rely heavily on operating leverage that may be difficult to achieve given current trends.

"We see risk in realizing 7.5% of operating leverage in bridge to CY27 20% EBITDA margin given our lower top-line estimates," the note stated, stressing the potential for negative revisions ahead.

In addition to the concerns around growth and profitability, Morgan Stanley highlighted execution risks associated with Udemy's strategic shifts, which include restructuring and a focus on profitability.

The analysts also warned that consensus estimates for revenue and EBITDA might be overly optimistic, with Morgan Stanley's own estimates 4% and 10% below consensus for FY25 and FY26 revenue, respectively.

Overall, Morgan Stanley prefers other players in the education software space, such as Coursera (COUR), which they view as offering a better risk/reward profile. "Udemy trades at a 31% premium EV/CY25 sales vs. its closest comp Coursera, despite Udemy's slower growth," the firm concluded.

Source: Investing.com