Naspers/Prosus still bullish on education business despite setbacks
Naspers and its international unit, Prosus, are still bullish about the decision to focus on education, despite its portfolio of businesses in this area having turned in a lacklustre performance over the past year, disrupted by new technologies like generative artificial intelligence (AI).
Prosus, which has large investments in companies such as China’s Tencent, Brazil’s iFood and India’s Swiggy, entered the education technology (edtech) market in 2016. Its main edtech units include Stack Overflow, Brainly, Byju’s, Codecademy, Eruditus, SoloLearn and Udemy.
The group — which is racing to make its businesses outside China’s Tencent profitable by the end of the current financial year
— saw a big uptick in its edtech platforms during the Covid-19 lockdowns worldwide. That led it to increase its investment focus on the sector. But that focus has not borne the fruit the group thought it would.
This week, as the group reported interim earnings to September, it said Stack Overflow — an Indian education platform that the group acquired in mid-2021 for $1.8bn — had a financial performance that was “below our expectations”. Because of this, the group considered it “prudent” to write down the business by $340m. Stack Overflow is the group’s largest investment to date.
Prosus said the unit was “affected by the rise and adoption of generative AI and the continued macroeconomic downturn”.
When asked if the group is still bullish about its education portfolio, group head Ervin Tu told Business Day: “The answer is yes.”
Tu is heading the group as it looks for a permanent replacement for Bob van Dijk.
“The problems we have experienced with our three disappoints — Skillsoft, Byju’s and Stack Overflow — they’re not representative of any loss of faith in the thesis. We need to fix those businesses but the rest of the portfolio is actually doing OK,” he said during an interview in New Delhi.
EVOLVING
Revenue for Prosus’ education segment rose 11% while trading losses remained relatively stable. Stack Overflow’s revenue grew 7% to $47m. The group said the business is “evolving its product offering for a world of generative AI and launched OverflowAI”. It is also reducing costs to drive up profitability.
Tu, who thinks “edtech is too broad a term”, explained that the group’s education businesses have generally done well. The sector appears to have been blindsided by the impact of generative AI, popularised over the past year by OpenAI’s ChatGPT, and was a victim of a global economic downturn.
“There’s upskilling for enterprises, then there’s teaching kids K though 12, then there is teaching college kids. Do we need to rethink monetisation? I’m not so sure. As I said, some of our portfolio is doing good. It’s doing well. Eruditus in India, accessing content from US universities. It’s doing fine. I don’t think there’s some broad problem.”
GoodHabitz, another of the group’s edtech businesses, grew revenue by 22% for the period. The growth and efficiencies are said to have driven a trading loss improvement of 40 percentage points. The group took a majority stake in the European provider of online training for businesses for about €212m (R4.3bn) in June 2021.
“What the market is confronting overall is macro [economic]. Education is considered more non-discretionary. But there’s a discretionary component. If inflation is high and you need to feed your family, then you sacrifice things like online tutoring for your kid,” said Tu. “Most of this stuff is additional — tutoring, enhancements. It’s supplemental.”
BUSINESS MODELS
Tu’s overall view makes sense given the global edtech market is said to have reached $194.6bn in 2022. Market research firm IMARC Group expects the market to reach $452.4bn by 2028, translating to a growth rate of 14.3% from 2023 to 2028.
But that growth can be realised only once fundamental issues and business models have been adjusted.
Byju’s, another troubled edtech investment, is dealing with challenges ranging from layoffs and losses to a government probe, alleging foreign exchange violations. For the third time in less than a yearand-a-half, Prosus has written down the value of its investment, pegging its valuation at less than $3bn. This is almost nine-tenths down from its peak valuation of $22bn in July 2022.
One item on which Tu will be judged is Naspers/Prosus’ ability to grow its interests outside Tencent. More important for the current profitability mission will be highlighting the value of the businesses in edtech, fintech, food delivery and classifieds, with an estimated value of $30bn, compared with Prosus’ $100bn stake in Tencent.
For the investor community, this may go a long way to changing perceptions that Naspers/Prosus shares are simply an affordable way to invest in Tencent.