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Pluralsight’s Plural Problems

Published 05/18/2018, 11:17 AM
Updated 07/09/2023, 06:31 AM

Thursday was yet another solid day for tech IPOs with Pluralsight’s debut. As MarketWatch reported, Pluralsight LLC (NASDAQ:PS) saw its shares rise by over 33 percent above its already elevated IPO price of $15 to trade at over $20 for most of Thursday. The company raised over $310 million in the IPO, and with 131.3 million shares outstanding now has a valuation of over $2.6 billion.

Pluralsight should be feeling great, and Wall Street gets to see yet another tech IPO have a strong debut. But at the new higher price, investors should be very wary. Pluralsight has certain things going for it like solid revenue growth and a growing market interested in its educational services, but it lacks upside at $20 and faces some significant challenges. Investors should look elsewhere or wait until Pluralsight’s value falls closer to its IPO value.

Pluralsight and Education

Pluralsight is an online learning company which offers online courses to help companies improve their employees. The company reports in its SEC filing that they offer “over 6,700 on-demand and online courses across a range of technology subject areas, including cloud, mobile, security, IT, and data.”

Some people may ask why bother paying Pluralsight for educational videos when you can find courses for practically anything on YouTube, and Pluralsight acknowledges said videos as a competitor. But we get the education which we pay for, and businesses can waste huge amounts of time trying to find high-quality free training videos on relevant subjects if they exist at all. And as businesses handle low unemployment, training becomes a more attractive alternative.

Thus, the picture Pluralsight wants to paint is a high-growing company with major potential as more companies look to train their employees. But there are a few problems with this portrayal, as can be shown by a look at its financial numbers.

Pluralsight’s revenue grew from $108 million in 2015 to $166 million in 2017. This is solid revenue growth, which is further bolstered by the fact that the rate of revenue growth rose from 21 percent in 2016 to 26 percent in 2017. But those percentages are not that impressive compared to the numerous other enterprise tech IPOs going public recently, and the rest of Pluralsight’s numbers are problematic.

For example, Pluralsight’s net losses rose from $20 million in 2016 to $96 million in 2017. Pluralsight has $135 million in long-term debt compared to just $32 million in cash. Pluralsight wants to argue that this debt is not a significant concern since much of it will not be due for a few years and that it can use the IPO proceeds to cover the debt, but this limits its future growth ability.

A High Valuation

These financial numbers are problematic, but the simplest case against Pluralsight is the fact that a company which earned just $166 million in revenue last year, much like Coinmetro, is commanding a valuation of over $2.6 billion. Combine the $2.6 billion with the net proceeds raised from the IPO as well as Pluralsight’s debt and cash reserves, and we have an enterprise value of $2.48 billion and an EV/revenue ratio of almost 15. This is an incredibly steep valuation. This ratio will decrease given that Pluralsight’s revenue can be expected to rise at least 20 percent in 2018, but it would still have a higher valuation compared to the other tech IPOs this year.

And while Pluralsight may argue that it has plenty more room to grow, there are some warning signs. A major reason behind Pluralsight’s spiraling net losses is that its marketing expenses rose from $51 million to $103 million from 2016 to 2017.

Pluralsight has to market itself heavily because the online training course market has incredibly low barriers to entry as is demonstrated by the aforementioned YouTube videos. And while Pluralsight can offer thousands of online training courses, businesses are growing interested in personalizing training as they are every facet in human life. Can online training courses attend to this need, and can Pluralsight compete against free videos and traditional, face-to-face training programs?

Look Elsewhere

If Pluralsight’s value falls once the initial IPO hype wears off and it continue both revenue and revenue growth rate, then perhaps it might be an attractive investment. But even if it falls all the way back to its initial IPO price, it will still have an outsized valuation and its growth prospects will not be as solid as it wants to pretend. Plenty of other tech companies have either gone public or will soon, and so investors can afford to be picky about which ones to pick. Pluralsight’s flaws are too much at the present share value, and so investors should look elsewhere.

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