Please ensure Javascript is enabled for purposes of website accessibility

Wall Street’s Best Digest Daily Alert - 9/10/2018

Analysts are looking for 30% annual growth for this cloud-based education company over the next five years.

Analysts are looking for 30% annual growth for this cloud-based education company over the next five years.

Instructure, Inc. (INST)
From Cabot Stock of the Week

As the world moves toward knowledge-driven economies, continuous learning is critical. It’s not an option to just sit on your butt if you want to get into a great college, land a terrific job or move up the corporate ladder.

For years, people have been achieving their knowledge goals with the help of specialized software called Learning Management Systems (LMS). LMS products burst onto the scene in the mid-1990s, primarily in the higher education market where industry innovator Blackboard gained first-mover advantage. Later, these same systems were adapted for use in the corporate world for training, performance management, recruiting, and compensation management.

An emerging leader in today’s LMS market is Instructure, Inc. (INST), a $1.4 billion market cap company that has developed an innovative and easy to use cloud-based learning management system for academic and corporate customers. The company’s software is delivered on a software-as-a-service (SaaS) subscription basis, which drives 85% to 90% of revenue. The rest comes from professional services.

Instructure’s applications are valued because they enable frequent, candid interaction between instructors and learners, streamline workflow, and allow creation and sharing of content, on all devices, from virtually anywhere. Its products are powerful and feature-rich, but easy to use, and feature elegant user interfaces.

The company says its software makes people smarter. I think that’s a fair claim. Millions of students, teachers, and employees currently use the software to achieve their learning goals. And many schools are switching to Instructure, especially from Blackboard, because the company’s software is so much better. Instructure also competes favorably against Desire2Learn (D2L), Moodle and Sakai.

Instructure’s first product, Canvas, launched in 2011, has quickly become the dominant solution in the higher education market. Canvas is used by seven Ivy League schools, including Brown, Harvard, Stanford, Yale and Dartmouth, as well as K-12 schools in 49 U.S. states and schools in over 70 countries.

In 2015, the company launched Bridge for corporate customers, essentially doubling its addressable market opportunity, which stands at roughly $9 billion today. Perhaps more importantly, this new enterprise opportunity comes with higher profit margins than the education space!

Since the introduction of Bridge, many high-profile corporate customers have been added to the client roster, including Tesla, McKesson and the Better Business Bureau. In Q2 2018 Bridge won a 10,000-seat contract with Holiday Retirement and another with the State of Missouri to train 40,000 people in the field of cybersecurity. Bridge is on track to generate 15% to 20% of new bookings.

All in all, Instructure has over 3,000 customers. If it can replicate the success it’s had in the education space in the corporate space, the stock could easily go on a multi-year run.

Growth has been tremendous. Revenue was up 51% in 2016, 43% in 2017 and 47% in the second quarter of 2018. Around 88% of revenue is recurring, and revenue retention is over 100%. In 2018, Instructure should grow revenue by 32%.

Earnings are in the red but trending in the right direction now that major Bridge-related investments are in the rearview mirror. Adjusted EPS will likely be around -$0.90 in 2018 and -$0.60 in 2019, and then turn positive in 2020.

Shares performed well in the first half of the year. But while second quarter earnings came in slightly ahead of expectations, third quarter guidance was a little lighter than expected (at $53.6 million to $54.2 million, versus consensus at $54.4 million) and second quarter billings were about $5 million lower than expected (at $199 million). That said, rolling 12-month billings, which strips out quarterly lumpiness, was fine at $214 million (up 31%).

In the context of a major tech and software stock selloff (at the time), this quarterly report didn’t get the job done. I believe the resulting dip in shares has provided a buying opportunity, and now is a terrific time to start building a position. Last week the stock jumped back above its 200-day line, giving us the buy signal we’ve been waiting for. BUY.


Timothy Lutts, Cabot Stock of the Week,, 978-745-5532, September 4, 2018