3 Alternative Perspectives for Investing in the Education Sector
Scott is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Often when people consider investing in the education sector, they primarily turn to for-profit education companies-- Apollo Group, DeVry, and Strayer Education, to name a few. However, investors would benefit from turning their attention to a less-obvious aspect of the sector-- the trends that are developing in the elementary and secondary schools.
One of the driving forces behind these trends is the U.S. Department of Education program, Race to the Top. This program requires states to meet certain criteria in order to receive federal funding. Additionally, it has inspired the development of the Common Core Learning Standards, which aims to bring the learning standards of individual states into alignment.
Learning a new language
One aspect of the Common Core standards, which is of great concern to educators, is the education of non-native English speaking students, or English Language Learners (ELL). Students, under Common Core, are held to the same standards as native English speakers. This is where Rosetta Stone, Inc. (NYSE: RST) can greatly benefit. “Delivering the best technology-based solutions for language learners”-- Rosetta Stone’s mission statement is clear, and it addresses the needs of school districts. According to its website, Rosetta Stone claims that over 20,000 school districts have incorporated its solutions into their curricula. Rosetta Stone’s TOTALe Pro solution offers schools a program, which provides students with a more natural method of learning English—one more focused on conversation skills and less focused on formal grammar instruction.
School districts, like most other institutions, are facing increasing strains on their budgets. As districts increasingly decide to cut costs by reducing personnel, Rosetta Stone offers school districts a cost-effective solution that doesn’t compromise instructional delivery.
Although free websites such as duolingo.com provide a threat to Rosetta Stone, the company demonstrated its willingness to reduce some of these threats when it acquired Livemocha for $8.5 million cash. Rosetta Stone’s President and Chief Executive Officer, Steven Swad, said that, “We are in the process of transforming Rosetta Stone to be the most dynamic and ubiquitous technology-based learning platform in the world. . . Livemocha will help accelerate that transformation.”
Not your parents’ science and math class
Regarding curriculum, one area in which educators and politicians are increasingly focusing on is Science Technology Engineering and Mathematics (STEM) education-- an area in which 3D printing is inextricably linked.
Although many school districts may balk at making a substantial investment in something like a 3-D printer, the price tags for these machines have been steadily declining, making it much more feasible for schools to purchase them. For example, 3D Systems Corp. (NYSE: DDD) recently made their Cube 3D printer available to Staples customers for $1,300 – quite reasonable when one sees that Staples offers several LaserJet printers for $6,000. Proving that the prices are not an inhibiting factor, the websites of 3D Systems and competitor Stratasys (NASDAQ: SSYS) present a number of case studies that showcase the use of 3-D printers in high schools and colleges.
As schools increasingly incorporate 3D printing into their curricula, it will contribute to the already impressive success of the main players in the space. 3D Systems saw revenue growth of 53.5% in 2012 and revenue growth of 31% in Q1 2013. This is, in part, due to new products revenue increasing to $38.3 million in Q1 2013-- a 60% increase from Q1 2012. Also, gross profit margins increased to 51.2% for full year 2012 while Q1 2013 saw gross profit margins increase to 52.4%. Stratasys has also experienced impressive success. From fiscal year 2011 to 2012 they saw revenue grow 30% from $277 million to $359.1 million; furthermore, non-GAAP gross margins increased from 56.7% in Q1 2012 to 59% in Q1 2013.
A lesson in energy solutions
Another way in which school districts are looking to reduce spending is by addressing their energy consumption. Companies like Ameresco, Inc. (NYSE: AMRC) can help school districts make the transition to more efficient energy solutions. For example, there are 20 case studies of school districts that have enlisted Ameresco's services on their website. From reading through earnings reports and other materials, I find it difficult to gauge just how substantial the revenue from school districts is, but the company often identifies school districts as a major customer base. Likewise, I would assume that school districts comprise a substantial component of the total construction backlog-- a backlog, as of March 31, 2013, of more than $1.5 billion, representing an 18% increase year-over-year; moreover, their pipeline (proposals, awarded projects, and newly signed contracts) increased 17% year-over-year to $2.8 billion at the end of Q1 2013.
What Did We Learn?
There are many different ways to play the education sector. Looking at issues regarding demographics and curriculum, though, provide interesting insights into determining which companies might prosper. Rosetta Stone, 3D Systems, Stratasys, and Ameresco offer compelling reasons to invest; albeit the plays are high-risk, they are also high-reward.
3D Systems is at the leading edge of a disruptive technological revolution, with the broadest portfolio of 3-D printers in the industry. However, despite years of earnings growth, 3D Systems' share price has risen even faster, and today the company sports a dizzying valuation. To help investors decide whether the future of additive manufacturing is bright enough to justify the lofty price tag on the company's shares, The Motley Fool has compiled a premium research report on whether 3D Systems is a buy right now. In the report, The Fool take a close look at 3D Systems' opportunities, risks, and critical factors for growth. You'll also find reasons to buy or sell the stock today. To start reading, simply click here now for instant access.
Scott Levine owns shares of 3D Systems. The Motley Fool recommends 3D Systems, Rosetta Stone, and Stratasys. The Motley Fool owns shares of 3D Systems, Rosetta Stone, and Stratasys and has the following options: Short Jan 2014 $36 Calls on 3D Systems and Short Jan 2014 $20 Puts on 3D Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!