Morgan Stanley Downgrades Udemy to Underweight

Morgan Stanley has downgraded Udemy from Equal-weight to Underweight in a note to clients, expressing concerns over the company’s strategic changes and declining growth rates. The firm has also reduced its price target for Udemy from $10.00 to $7.50 per share, indicating a more cautious perspective on the stock’s future.

The analysts highlighted that Udemy’s recent strategic pivot might reflect waning demand, as the company struggles to sustain both growth and profitability. They noted, “Growth deceleration will persist due to weak web traffic and challenges in converting consumers to paid services, coupled with tighter budgets from enterprises and macroeconomic impacts linked to the strategic shift.” This highlights the ongoing pressures faced by Udemy in both its consumer and enterprise markets.

Furthermore, Morgan Stanley pointed out that Udemy’s revised profitability goals — including an aim to achieve $130-150 million in EBITDA by 2026 — depend significantly on operating leverage that may prove difficult to attain in light of current trends. “We see risks in achieving 7.5% of operating leverage en route to a 20% EBITDA margin by 2027, considering our lower revenue projections,” the analysts noted, indicating potential downward revisions could be on the horizon.

In addition to concerns about growth and profitability, Morgan Stanley emphasized execution risks surrounding Udemy’s strategic changes, which involve restructuring and a renewed focus on profitability. The analysts cautioned that consensus estimates for revenues and EBITDA might be overly optimistic, with their own forecasts sitting 4% and 10% lower than consensus for FY25 and FY26 revenues, respectively.

Ultimately, Morgan Stanley expressed a preference for other companies in the education software sector, such as Coursera, which they believe present a more favorable risk/reward profile. The firm concluded that Udemy trades at a 31% premium in enterprise value to projected sales for 2025 compared to its closest competitor, Coursera, despite Udemy experiencing slower growth.