Instructure (INST, Financial) jumped 5% to reach five-month highs following reports that KKR (KKR, Financial) and Francisco Partners are considering taking the educational software company private. INST was previously acquired by Thoma Bravo in late 2019 and went public in 2021 at $20 per share. Thoma Bravo still holds about 80% of INST shares.
INST's core platform, Canvas, is widely used in education at all levels globally. Thoma Bravo aimed to benefit from a hot IPO market and the surge in online learning due to the pandemic. However, the expected growth did not materialize, and competition in the educational software market increased. Thoma Bravo started exploring a sale for INST as early as May.
Given the stock's underperformance, a deal to take INST private seems increasingly likely.
- Despite underperforming major indices, INST has shown respectable quarterly numbers with double-digit sales growth in almost every quarter and consistent profitability. In March, INST projected medium-term growth targets of 5-10% for core products and 10-15% for growth products, aiming for an overall 9-11% organic growth rate.
- INST's goals are commendable given the competition from tech giants like Alphabet's (GOOG, Financial) Google Classroom and established names like Blackboard, all vying for a relatively fixed number of learning institutions.
- The acquisition of Parchment has expanded INST's total addressable market, potentially adding $2 billion in revenue. Parchment's platform allows schools to securely issue digital transcripts and diplomas.
- INST boasts strong margins, with adjusted operating margins of 40.8% last quarter, a 420 basis point improvement year-over-year. Recurring gross margins are above 80%. Management noted that AI could further enhance internal efficiencies.
While a return to private ownership may limit INST's upside, the company's competitive advantages and solid fundamentals could command a high valuation, making it worth consideration.
