Jack and Suzy Welch and Apollo Group

| About: Apollo Education (APOL)

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I've been waiting for an excuse to put up these pictures. The WSJ just had an article on Welch and his new online MBA program. Here is one excerpt:

When he first approached Mr. Welch at the party, Mr. Clifford says the two men argued about the merits of online education. "We were yelling at each other," Mr. Clifford says. Mr. Welch confirms the incident. Mr. Welch invited Mr. Clifford to see him the next day, and Mr. Clifford says he has "hounded" the former CEO ever since.

Seems like an interesting meeting, no? The Apollo Group (NASDAQ:APOL), which runs the University of Phoenix and other campuses, has a volatile stock. In the past six years, it has gone as low as $33/share to as high as $95/share.

APOL's main issue is credibility. College degrees, at the end of the day, are just pieces of paper. No one will pay tens of thousands of dollars for a piece of paper unless it will lead to a good job and/or higher lifetime earnings. Thus, the real value of most college degrees lies in their ability to connect students to a loyal alumni network. The longer an institution has been around, the higher the value of its degree, because the school will usually have more alumni. Size doesn't necessary matter--little-known, selective Carleton College probably has a stronger network than the much larger UC Riverside.

In contrast to many top tier colleges, the University of Phoenix and other Apollo campuses have not yet established a vast, loyal alumni network. (Readers, please correct me if I am wrong--I'd love to hear about companies that focus on hiring University of Phoenix grads.) Many Apollo graduates attend night school or may not be particularly loyal to any of Apollo's various universities. Getting an online degree may be faster and more convenient, but numerous factors, including no nationally-recognized sports teams, may impede a strong Apollo alumni network.

The addition of Jack Welch improves the Apollo Group's credibility, but it is still unclear how its various educational institutions plan to create lasting loyalty. I can think of plenty of famous Harvard, Stanford, Santa Clara (Steve Nash, Gavin Newsom, etc.), and UC Davis graduates (Urijah Faber, Jackie Speier, etc.), but no famous University of Phoenix grads. (Note: I did a quick online search. Apparently, Shaq and Lisa Leslie have received degrees from the University of Phoenix. It's interesting that Apollo hasn't successfully used their celebrity status as a marketing device.)

I wish Apollo much success in the future. Our established universities need competition; otherwise, they will keep increasing tuition above the rate of inflation. Apollo is like a new charter school trying to gain credibility in a world of established private and public schools. If it succeeds, everyone but the establishment benefits. As an investor, however, it may be wise to wait until the company establishes a larger and stronger alumni network before jumping in.

Disclosure: I have no shares in APOL and am neutral on the stock.