The Pearson (LSE:PSON) share price took quite a tumble last week. The education publishing firm watched its stock collapse by nearly 15% in a single day following its latest trading update. So what’s got investors upset? And is this an opportunity to buy the business at a discount for my portfolio?
The progress continues
I’ve explored this company before. But as a quick reminder, Pearson is a leading provider of educational content and digital learning services used in schools and universities. Last Friday, it released its nine-month trading update. And despite what the Pearson share price would indicate, there was some encouraging news. Revenues for the period were up by 10%, driven primarily by its Virtual Learning and Assessment divisions.
Furthermore, its recently launched Pearson+ learning app seems to be taking off. This subscription service allows US students to access all of Pearson’s educational content for $14.99 per month. And as of the end of September, over two million people had signed up.
This is obviously good news. So why did the stock plummet?
The falling Pearson share price
Seeing growth in the top line is encouraging, especially since revenue between 2016 and 2020 has actually fallen steadily by around 25%. However, what’s less exciting is that the growth rate is, in fact, slowing down, which seems to have spooked investors.
The firm’s Higher Education division saw its sales decline by 7% over the last nine months. After conducting an internal investigation, Pearson has discovered that the US is currently suffering from an enrolment decline at community colleges. The factors behind this are undoubtedly numerous. But it could most likely be attributable to both the pandemic and a strengthening labour market. Regardless, the end result is that there are fewer students for Pearson to sell to this year.
What’s more, the rise of Pearson+’s popularity may not be as lucrative as it seems. Of the two million subscribed users, only 100k are actually paying for a monthly subscription. The rest have signed up through bundles and other special offers included in existing subscription services.
The bottom line
While slowing growth is never a pleasant sight, I feel investors may have overreacted. The catalyst behind the decline stems from a seemingly temporary issue within university enrolments. This is obviously out of the company’s control. But as the pandemic slowly comes to an end, education institutions can return to more traditional teaching methods. This may result in higher education becoming more appealing again.
That’s what I think, at least. And it seems management agrees. Why? Because despite this slowdown, guidance remains unchanged. This means the company seems to be on track to deliver operating profits in line with market expectations by the end of the year.
So, is the fall in the Pearson share price a buying opportunity? Maybe. But it’s not one I’m interested in taking advantage of just yet. Pearson+ seems to be the next primary growth channel for this business. However, given its relatively short operating history, it’s hard to judge just how successful it actually is. Therefore, I’ll be keeping this stock on my watchlist for now.