Aspen Group: High Growth Online Education Disrupter

Summary

• ASPU is a fast-growing online education company targeting a profitable niche.
• ASPU is forecasting positive EPS in Q4 2022 and is making significant investments to get to that goal.
• A recent takeover of a large competitor gives an indication of the value of the business suggesting a 300% return for investors.

Fly View Productions/E+ via Getty Images

ASPU is a fast-growing online education company that operates two online universities pivoting into pre-licensure Nurse training, a highly profitable growing sector of the education market. Sustained revenue growth in the coming years driven by new training facilities coming online as part of the Aspen 2.0 development plan look set to deliver a 300% increase in share price. Multiple valuations confirm this target price, and the recent takeover of ASPU's largest competitor shows that someone is prepared to pay it.

Wall Street Analysts covering ASPU are very optimistic, and a significant number of Institutions have increased the size of their holding in the last 12 months.

Source: Seeking Alpha rating page

ASPU is a fast-growing Online Education company

ASPU operates two online universities Aspen University and the United States University, which it acquired in 2017. ASPU initially intended to offer a complete university education to any motivated student and focused on building a broad range of courses. They had a vision of making money by bringing University education to disadvantaged communities. Revenue has increased quickly along with student numbers since its inception.

Source Author Generated: Data from Seeking Alpha

Online companies, by their nature, develop a great deal of information. Analysis of the data regarding pupil performance, outcomes, and profit ASPU management realized that Nursing students were far more profitable than others. Nurses complete their courses and continue training after graduation.

The lifetime value of a nursing student is high; it is a profitable niche

Aspen decided to pivot its business towards providing Pre Licensure Nursing training. The plan, called Aspen 2.0, involved significant investment and a conscious decision to reduce the size of the rest of the business by re-directing advertising spending and using the proprietary CRM software to prioritize outreach to students more likely to join a nursing course.

Source: Aspen presentation

The Nurse training industry

The demand for Registered Nurses is growing, the healthcare industry is snowballing, and many nurses are at or close to retirement age. The US Bureau of Labor Statistics suggests that almost 200,000 registered nurses will be needed every year for the next decade. Nursing is a high-income aspirational profession (median income $75,000 pa).

You need to take an accredited registered nursing program to become a nurse; bachelor's degrees are the most common and respected. You must then sit the NCLEX-RN examination and become state-accredited.

At present most nurses train at University and state colleges; these institutions are at maximum capacity. The current waiting time to get on a course is more than three years. Over 50,000 people with the correct qualifications fail to find training every year despite the US health care industry being in desperate need of more Nurses.

Nurse training is a large growing industry with currently unsatisfied demand. Unlike many parts of the online education industry, it also has significant barriers to entry. Courses must be accredited, and institutions must provide the "hands-on" medical training facilities accreditation requires. Any provider must ensure that nurses train with actual patients and real equipment in the correct controlled environment. Providers must have a training campus in each state they intend to operate in and have strong relationships with Hospitals and Clinics in the area that are willing and able to provide access to patients.

The 50,000 people being turned away from Nurse training now represent a market in the region of $1.5 billion per annum. ASPU's current turnover is $67 million. Three online universities are chasing this market, Chamberlain the largest, then Walden, and finally ASPU.

ASPU planning for the future

Having recognized the opportunity ASPU is pivoting both of its universities towards Nursing, they already both had an accredited pre-licensure course along with training facilities in place.

The plan, called Aspen 2.0, is seeing ASPU move from providing a reasonably comprehensive university to a Nursing Focussed one. As of Q1 FY22 (ended July 2021), Nursing represents 87% of the active student body ASPU report +20% EBITDA for each training campus.

ASPU is investing heavily in expanding the number of its prelicensure training campuses to enable it to grow this business and bring it to profitability. ASPU reports that it takes six quarters for a new training site to become profitable.

Aspens first PL training campus opened in 2018 in Phoenix, a second Phoenix site opened the following year. In 2020 two more were added in Austin TX, and Tampa FL; in 2021 Nashville Tennessee will shortly be joined by the biggest metropolitan site they have built to date. Six further sites are currently under development. Within 12 months, ASPU's nurse training capacity will have been multiplied by 4. These sites provide the "hands on" training the majority of instruction takes place online, it is an excellent low cost model allowing aspirational motivated people access to a new rewarding career.

The competition to ASPU

Aspen has two main competitors Chamberlain and Walden Universities targeting this particular part of the industry with the mix of online and offline campuses required.

Aspen is the lowest cost operator of the three and hence can offer lower prices to its students. Much of this cost-saving is derived from the proprietary tech platform.

Source: Investor Pack ASPU

At these prices, ASPU delivered a margin of 54% in its latest filings but intends this to rise to 59% as the newer training campuses increase their student numbers.

ASPU has a very high 95% satisfaction rating amongst its customers. One of the reasons for this is the monthly payment scheme it offers. Students can pay a fixed amount ($250-$350 per month course dependent); this scheme is unique to ASPU. It means that people can fund their courses without taking on student loans. The majority of ASPU's student body take advantage of this offering and graduate without student loan debt.

This lower-cost offering combined with a monthly payment plan and extreme customer satisfaction implies that ASPU has a good chance of capturing a significant portion of this $1.5 billion a year market and utilizing its newly established increased capacity.

Valuing ASPU

Adtalem Global Education (ATGE) acquired ASPU's largest competitor Walden University in Q1 2021. Adtalem paid $1.48 billion in an all-cash deal, making Adtalem a powerful force in the industry as they already own Chamberlain, the other major player.

The deal offers an insight into what someone might pay for ASPU. If we assume the price is related to the number of students studying at the university, we can use 2020's graduation figures as a proxy.

Source: Author generated data from national center for educational statistics

A second valuation comes from a professionally produced discounted cash flow analysis.

Source: SimplyWallStreet

The SimplyWallStreet valuation is driven by an earnings forecast increase of 65% and the company achieving profitability Q4 2022. Both of these facts are the expectation of ASPU management and the six analysts giving coverage.

I have also modeled the business to get an idea of the maximum likely share price increase. Suppose ASPU manages to capture a quarter of the previously identified $1.5 billion market and keep its margins between 54% and 59%, leading to a 20% EBITDA per training site. In that case, it becomes a multi-bagger showing a ten-fold increase in share price.

Over the last three years, earnings per share have increased by 21% on average, whilst the share price has only increased by 8%. This represents a significant opportunity for investors.

ASPU finances

ASPU is growing quickly, it has increased revenue every year and is pivoting to focus on higher-margin students. Such a pivot requires investment, and while the new sites grow, a significant cash burn.

In the quarterly statement delivered August 2021, Aspen reported that they had $6.6milion in cash and had drawn down $5million on a credit facility due to expire in November 2022. The $5million drawdown is for general business expenses and the rollout of new campuses. Before drawing down the $5million, the company had no debt.

Source: Author Generated data from Seeking Alpha

During this growth period, the company has managed its money wisely, employees have increased from 435 in April 2019 to 742 in April 2021, yet net loss only increased from $2.1 million to @$2.3 million. Capex is up significantly from less than a million to more than 6.

ASPU is in the middle of a significant transformation. Three new sites just opened, three more are in development. The new sites are expensive and do not reach profitability for six quarters.

ASPU forecasts they will hit positive cash flow by Q4 2022

With the current cash burn rate, ASPU will probably not have sufficient reserves to get to Q4 2022. They will need to raise some extra cash. Of course, this may mean more debt, but it could be a follow-on offering dilutive to shareholders. My independent model and research suggest they will need to raise between $5 and $6 million.

It is worth noting that management maintains that the Aspen 2.0 plan will get them to positive cash flow without the need for additional funding.

Conclusion

ASPU is a fast-growing online education company, its Aspen 2.0 business plan is seeing it pivot its offering towards the higher-margin Nursing education segment that has significant pent-up demand. ASPU is expanding its network of Nurse training facilities giving it a sustainable competitive advantage and putting in place a significant barrier to entry.

Per share valuations range from $17 using the Walden University takeover deal, $26 from SimplyWallStreet's DCF and $52 if they capture 25% of the available market.

In every case, ASPU is currently significantly undervalued having a share price of less than $5.

I opened a position on Nov 11th using leverage provided by IG markets (LON: IG) at $4.99. I intend to hold the position for approximately 12 months and have set a target price of $15.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of ASPU either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am also long COUR and LRN in this space. My ideas are typically contrarian focussing on the competitive situation and products of a company.

Comments

[Stephen Tobin]

Aspen has received a damning letter from the Arizona State Board of Nursing dated Feb 28th.
Aspen have 30 days to respond, if the allegations are true then Aspen is un-investable.
If Aspen can refute them then I will look at the company again.
Thanks to @EDUInvestor for sharing this link.

www.republicreport.org/...

[Christopher Wallace]

Definitely a fork in the road here. The market has braced itself for a poor quarter, and so that bad news is probably mostly priced in. Even slightly positive numbers are likely to push price up materially from these low numbers. So I see skew favoring the longs at this point. Decent numbers will get me to add, and they would have to be really horrible for me to dump my position. But buy or sell, I won't be standing still.

[EDUInvestor]

Wow, what a train wreck! Looks like a lot of tax loss harvesting from the large volume. Or could be some negative news about possible enrollments or regulatory/nursing board approvals. But it is trading even lower than I had thought it would drop. They could very well disappoint on enrollments for the 4th quarter and should have good visibility to that number. So maybe those results are leaking out. Or possibly some sanctions or restrictions from the Arizona Board of Nursing on their review for Full Approval. But the large drop in stock price on very high volume does not bode well!

[Paul Hughes]

@EDUInvestor The most obvious catalyst for the ~18% price drop in ASPU today was that it was downgraded by an analyst, from a price target of $11 to $6.

www.benzinga.com/...

Roth Capital Downgrades Aspen Group to Neutral, Lowers Price Target to $6

[Stephen Tobin]

I think @Paul Hughes right as the downgrade is the only confirmed bad news. Your thoughts may also be correct but no confirmation yet. My trade got crushed and closed with a loss of 1,000GBP, not one of my better days. The share price is now in oversold territory and if it shows a turnaround I will buy again, barring any new info I think it still has a good 1-year potential.

[EDUInvestor]

@Paul Hughes Thanks for the info and you are probably correct that the downgrade was the primary reason for the drop in price. It is a shame because the analyst coverage on this stock has been horrible. They just regurgitate what the CEO tells them and develop their estimates on his unrealistic projections. I guess Roth finally gave up the ghost and downgraded. It is a little late! And you would have to expect further downgrades.

[CatCameBack]

I think most of what people complain about (and debate endlessly in some comment sections of ASPU articles) when saying management can not be trusted, have callously missed their estimates of profitability, that the business model doesn’t work, etc….. can be attributed to one basic mistake management made. That mistake was assuming that since the Phoenix location(s) was hugely successful, then Austin and Tampa, though much smaller cities, would be very successful very quickly, that they would be like Phoenix. That has not proven to be the case, both with Covid happening at pretty much the worse time it could happen with respect to opening new schools, and the fact that these smaller cities simply did not provide enough students fast enough. There may also be some enrollment delays in Austin and Tampa due to state boards wanting them to go more slowly. ASPU also recently opened a school in Nashville which may be doing better with initial enrollments, but was also in a smaller market. But ASPU has now more or less admitted to their mistake and have said that newer schools will be opened in bigger cities, this is basically “ASPU 2.0”. So, call it what you want, management being dishonest, or inept, or too optimistic, or making a legit mistake in miscalculating the population size needed for their business model to work. How you view this mistake is how you are going to view ASPU. If/When overall enrollment starts to go up significantly, that will be the time to buy into them again because there is a large need for what they offer.

[The Bulls Bay]

@CatCameBack Good point, too. Nursing is still one of the fastest growing professions today and likely for the foreseeable future. The extent to which ASPU is able to capitalize on this trend will determine the stock's performance.

[EDUInvestor]

@CatCameBack All valid points. But you can't conflate the large demand for nurses with a spike in enrollments. No one has challenged the demand for nurses or pre-licensure nursing programs. The enrollment growth will be moderated by the various states’ nursing boards.

[Stephen Tobin]

@CatCameBack excellent comment making a number of valid points

[The Bulls Bay]

I think the reason for the stock's weakness is simply that investors don't believe management. Therefore, this is the classic "show me story." Even the author of this article in some way indicates his disbelief in the Aspen 2.0 model, since he wrote according to his model ASPU needs to raise $5 mm to $6 mm by 4Q F2022, however he concedes that, per the Aspen 2.0 strategy, management says it has sufficient capital. Perhaps part of the misunderstanding is that investors don't realize 4Q 2022 ends in April 2022 not December 2022.

[Patrick Irish]

@The Bulls Bay And even if we believe they will be profitable by April 2022, how long does that profitability last. Is it for 1-3 quarters and then management spends more on growth or maintenance capex and it goes negative cash flow again? But lets say its forever profitable, what is the level of profit? There is certainly no visibility here that says by April 2022 this company will forever be cash flowing >15%, growing more over time, and its an amazing buy today to get a piece of that cash flow.

[The Bulls Bay]

@Patrick Irish Excellent points. Therefore, I think the fair conclusion is that ASPU is a "show me story" that still needs to prove itself. However, even with that conclusion, at $4 the risk/reward is likely favorable. There's a better chance that the next stop is $6 than $2. The decision to buy at the current level, given the uncertainty, is an indication of each investor's risk tolerance. Some would rather wait-and-see, and then buy at $6 when they have more confidence. Others would opt to take a starter position at $4.

[Patrick Irish]

@The Bulls Bay "However, even with that conclusion, at $4 the risk/reward is likely favorable. "

We are in the strongest bull market and I've seen horribly run companies run up 10x. I agree that if I had to own or short this company, I would own it. But if this market went south, cash losing businesses like this would get thrown in the trash.

[EDUInvestor]

Your valuation comparing bachelor degrees awarded versus Walden is flawed. Please site your source. But I believe the 1,095 bachelor degrees awarded by Aspen University is mostly the online degree completion (bridge) program and not pre-licensure. This is a short, low tuition program and available online from several online universities for those students that need non-clinical coursework such as general education to complete their bachelors degree. If you review ASPU's transcripts and growth strategy, it is to expand pre-licensure nursing. Over the past year ASPU has graduated under 100 pre-licensure nursing students. APEI paid $329 million for Rasmussen - the largest provider of pre-licensure nurses. Rasmussen had 18,000 students, 8,200 pre-licensure nursing students, 24 campuses and $40 million in adjusted EBITDA. So doing the very rough math that equates to about $40k/nursing student. Aspen University has around 1,500 active pre-licensure students at a much lower tuition rate than Rasmussen. But even if you accept the same $40k per student x 1,500 pre-licensure students Aspen would have a valuation of $60 million or $2.40/share. And Rasmussen had adjusted EBITDA of $40 million and ASPU has experienced negative adjusted EBITDA. Rasmussen has 24 campuses and ASPU has 4. At $17 per share ASPU would have a valuation of $425 million or 29% higher than what APEI paid for Rasmussen. Hard to wrap your head around that valuation.

But I do agree with you that ASPU will need to do another dilutive capital raise. Or a sale of the company to a strategic or financial buyer.

[Stephen Tobin]

@EDUInvestor Hi, i read your two articles on ASPEN and thought they were pretty good. It is a shame you have not written on more edu stocks as the more people focussing on this area the better.
As you know it is really difficult to value these companies that is why I presented 3 versions. I did quote my source for the data used in the Walden version as well as the source of the DCF, the multi-bagger valuation is my own and its methodology is explained. In the end, I went for the Walden valuation as it was the lowest of the three by far.
I don't disagree with the work you present regarding Rasmussen however I preferred to stay away from EBITDA as, in my opinion, I don't think it is a great measure for pre-revenue companies. I also did not consider Rasmussen to be chasing the same market, it is an established brick and mortar provider that is growing its online presence. At present, I don't think it offers online PL bachelors it does offer RN-BSN, MSN and a doctor of nursing practice.

[EDUInvestor]

@Stephen Tobin You make some good points and I agree that valuing a "pre-revenue" company is challenging. However, ASPU is not pre-revenue but more "pre-income" company. They generate revenue, but continue to not deliver profitability despite management's projections.

The question is if and when they will be profitable. Given that part of their program is on-ground (simulation labs, clinicals) they do compete with Rasmussen for students. But I agree that Aspen's model is more "disruptive" but can they be profitable before they run out of cash. The Phoenix campuses are profitable but is Phoenix the exception or can they replicate to other states and markets. It is going to take time to prove out their model and I am not sure they have the time to make it happen.

At the current stock price you can almost view it as an option play. My guess is that they end up being bought by a large strategic or financial buyer at a premium to the current stock price who has the patience, capital and management to prove out the business model. Another capital raise when the stock trading at $4/share would be very dilutive.

[Thomas Hubert]

Cite your sources.

[Stephen Tobin]

@Thomas Hubert Hi thomas, i think i cited every source, please let me know if you need something specific

[Situm]

CEO has been promising leverage for almost 4 years now. Instead there are losses every quarter. Moreover, he has undoubtedly lost favor with the funds that believed his gibberish and consequently got murdered (look at a chart). These same funds are certainly looking to harvest some Capital losses as that’s all they can get. So, if you want to take a flyer wait for it to bottom. $4 is my guess

[EDUInvestor]

@Situm I agree with you that this looks like tax loss harvesting. Especially given that most stocks are up on the year and investors need to offset gains. Looks like the stock is trading down to your “buy” point.

[Situm]

@EDUInvestor I just bought a few thousand as a flyer.

[EDUInvestor]

@Situm I hate to admit it but so did I. Not a huge position but unless results disappoints again or another shoe drops this should be close to bottoming out. I am now viewing ASPU as a potential take-out target given the low valuation and upside potential if they prove out their business model. So my purchase is an option play on that event.

[Patrick Irish]

I would be careful trusting management. If you have read the CCs over the past few years and taken notes, there were lots of plans that did not pan out. Good luck on your bet.

Btw, what does IG markets (forex exchange) have to do with buying shares of ASPU? And is your leverage options like $5 Feb 18, 2022?

[The Bulls Bay]

@Patrick Irish Exactly. As I wrote in my comment below, the stock will only re-rate higher if management gains credibility. In some ways, I think ASPU trades at a discount due to management credibility issues.

[Stephen Tobin]

@Patrick Irish Hi Patrick, IG markets offer leverage on stocks as well as FX I use their spreadbetting platform for some trades rather than buy shares and quote when I do. I run two accounts one when I buy the stock for the long term and one where I take a short-term position that will run at most 1 year. The benefit of this for me (of this short term trading method) is that I do not have to pay tax on any profit I make, the tax is paid on the spread when the trade is opened. The leverage I receive is 4 X the margin I put down. In this case, I put down 1,000 GBP and the position taken is valued at 4,000. The margin offered does alter from asset to asset, many shares get x5 but some like cannabis shares only get x2. The trade does not have an expiration date and can be closed at anytime.
I agree with your comment on management but think this plan has legs, I have a 1-year time horizon which should cover the new sites and hitting positive eps, but we will see

[Patrick Irish]

@Stephen Tobin Quite the setup and for a binary outcome, whether management gets this to sustained profitability or not, that kind of bet makes an interesting risk:reward. Good luck.

[The Bulls Bay]

This is a nice article that presents the investment thesis for ASPU well. I think the stock will re-rate higher, as management executes on its new strategy and gains more credibility with investors and analysts. The key catalysts will be reaching profitability and free cash flow generation. Note that fiscal year 2022 ends in April 2022.