Don’t Buy Apollo Education, Diploma Mills Doesn’t Have Any Future
Jan. 17, 2016 7:58 AM ET
Rumors about a possible sale of Apollo Education Group at $1 billion caused its stock to gain around 14% over the last week.
The company operates in a declining industry, and regulators have made it pretty much impossible for it to continue operating with its current business model.
The company’s Q4 2015 shows an alarming burn rate, and investors should take caution even in the short run.
Apollo Education Group remains a vulnerable investment candidate, and we strongly recommend investors not to buy the rumors.
As a private educational service provider, Apollo Education Group Inc. (NASDAQ:APOL) offers a range of degrees to students, including undergraduate, graduate, certificate and non-degree educational programs and services.
Most people would not recognize the company Apollo Education Group, but they would probably recognize its flagship educational institution, one of the most prominent online universities, University of Phoenix.
Unlike most online educational service providers in the United States, Apollo Education Group is not a new company by any means. It was founded in 1973 by Dr. John Sperling, a true visionary who had foreseen long ago that the educational landscape in America was changing from traditional young college goers to a more diverse demographic that needed the applicable education to improve their lives.
Shortly after forming the company in 1976, they opened the University of Phoenix, and it now operates a handful of educational institutions, such as Western International University, College for Financial Planning (CFFP), Universidad de Artes, Ciencias y Comunicación (UNIACC) in Chile, Universidad Lationoamericana (ULA) in Mexico, and BPP University College (BPP) in the United Kingdom.
Besides operating these prominent institutions, Apollo Education Group also operates Carnegie Learning, which is a publisher of research-based curriculums from Carnegie Mellon University.
Apollo is a Fallen Star
Figure 1: Apollo Education Group’s Revenue Chart Says It All
Although the company was founded in an era when bell bottom pants were still considered cool, its top line shone the most after four decades in the business, in the first quarter of 2010. In Q1 2010, Apollo Education Group’s revenue topped at $1.35 billion.
Back in early 2010, its flagship university had more than 450,000 enrolled students, and by March 2015, this number declined to just 213,000. As a result, over the last five years, the revenue has declined by more than 56%.
It was not only Apollo Education Group that has turned into a meteorite, but the whole for-profit education industry has suffered over the last five years due to being accused of providing low-quality education at a high cost.
Prior to 2010, most of the educational institutions run by the company had an open admission policy, which means anyone who met the educational requirement could enroll without any questions asked.
Critics of the for-profit education industry alleged that this open door policy was causing tax payers losses, because the institutions took in any student who qualified for federal student loans and grants, and these students often dropped out or could not find a job after graduation.
The level of employability of students who graduated from for-profit educational institutions was so low that most of the graduates defaulted on their student loans. According to a CNN article, almost half of the student loans were defaulted on by students who went to for-profit institutions in 2013, and they only represented 12% of the total student population. Critics even called Apollo Education Group’s flagship institution, the University of Phoenix, a diploma mill.
In response, the Obama administration took some severe actions against the whole for-profit industry, after calling some of the marketing tactics “predatory.” As a result, Apollo Education Group and its competitors saw declining enrollments.
In May 2015, one of the company’s competitors, Corinthian Colleges, filed for Chapter 11 bankruptcy in the United States, and industry experts started to speculate if other for-profit educational service providers would go under as well.
Downsizing of the Meteorite Did Not Work
The declining top line of Apollo Education Group caused its $137.5 million positive cash flow in the end of Q3 2013 to fall towards only $13 million at the end of Q4 2014, representing a 90.54% decline.
Figure 2: Apollo Education Group’s Cash Flow from Operations Declined by 115% Since Q3 2013
The falling revenue prompted management to cut costs on all fronts, and its cash flow went up temporarily in the next two quarters. They decided to close 24 sites of the University of Phoenix in August 2015 due to the continued downturn in profits. However, that did not turn the tide.
In the last quarter, ending November 30, 2015, Apollo Education Group’s cash flow reached -$18.87 million and the return on equity (TTM) declined to -5.65% compared to 18% in Q3 2013.
Figure 3: Apollo Education Group’s Burn Rate is Alarming
The company’s latest financials shows that its expenses have gone up, while its cash and equivalents have gone down. Investors should take extreme caution while considering investing in this stock.
Apollo Education Group Might Be Sold Very Soon
On January 11, The Wall Street Journal (WSJ) reported that New York-based private equity firm Apollo Global Management is exploring the possibility of buying Apollo Education Group. Although both companies are named Apollo, they are actually not related. The WSJ article claimed that the deal may value Apollo Education Group at $1 billion.
On January 11, APOL was trading at $6.34 per share, which translated into a market capitalization of $685.1 million. Hence, if these two Apollos actually make the deal, it would offer secondary investors a 45.96% upside potential. Since WSJ ran the article, the stock price of Apollo Education Group has climbed to $7.22 per share, representing a 13.88% increase over the last week.
Since Apollo Education Group started making profits from its online programs, the distance learning landscape has gone through tectonic changes. A lot of top universities are now offering free online educational programs for people who are genuinely interested in education than simply getting a degree from diploma mills.
The popularity of Massive Open Online Course (MOOC) has given birth to a lot of new-age companies that even offer certifications. For example, students from around the world can now participate in online courses at Coursera, edX, and Udacity, often for free. Coursera offers most of its courses online for free, where students only need to pay a token fee of $50 get a certificate once they pass the course. Although students cannot earn university-level degrees with MOOC, they can certainly get a university-quality degree for free.
The rise of freelancing, often termed as the gig economy, has also made it difficult for companies like to Apollo Education Group to sell their diplomas, because employers who prefer to hire freelance workers often recognize these type of MOOC certificates, where traditional employers required formal undergraduate or graduate degrees.
The bottom line is that unless Apollo Education Group finds a buyer who is willing to pay a premium, there is no solid reason to think the company’s market valuation will go up anytime soon. The business model that it relied on till 2010 is now virtually non-existent. Especially after government regulators started taking away the funds this company relied upon to turn a profit.
Although the $1 billion potential sale would provide significant upside to investors, we would like to suggest to readers that they exercise extreme caution when considering buying stocks of Apollo Education Group. Both the long-term and short-term prospects appear to be doomed, and the only factor that is causing the recent uptick is the rumors of a possible sale of the company.