By William Symonds
Over the past three years, the University of Phoenix Online (UOPX ) has pulled off the rarest of feats: Its has stock skyrocketed, hitting an all-time high of $47.17 on May 12, despite the worst tech-stock bear market in history. Apollo Group, which also owns the University of Phoenix, the nation's largest private university, first floated UOPX as a tracking stock in September, 2000 -- just months before the broader tech market cratered.
The aim, says Apollo CEO Todd Nelson, was to raise the money needed to help Phoenix Online keep up with blistering enrollment growth in its online degree programs. And that growth has scarcely faltered. Phoenix Online's shares have soared 557%, making it one of the best-performing tracking stocks ever and helping it reach the No. 17 spot in BusinessWeek's 2003 Info Tech 100 list.
Now, however, some wonder if the stock is hitting its zenith as tech markets start to show signs of recovering. It has slid a bit in recent weeks to around $46. And it's trading at a very rich multiple of 43 times expected earnings, compared to a p-e of just 17 for the broader market. "It has had a tremendous three-year run," says Greg Cappelli, who follows education stocks for Credit Suisse First Boston. But along with other for-profit higher-education stocks, "it's at a level where it might cool off a bit."
Cappelli hastens to add, however, that Phoenix Online's fundamentals are remain robust. It's clearly the dominant player in a nascent market that still has lots of potential for growth. The bricks-and-mortar University of Phoenix was one of the first institutions to identify and serve the burgeoning market for educating working adults. In the late 1980s, long before the Web debuted, the school began to experiment with offering its courses online. It got off to a slow start, "and we lost money for a number of years," recalls Brian Mueller, Phoenix Online's CEO.
As a result of this head start, however, Phoenix Online was ready to capitalize on an online-education market that began exploding in the mid-1990s. Today, about 13% of the 500,000 or so U.S. students earning a degree via the Net are enrolled at Phoenix Online, figures Sean Gallagher, an analyst at Boston-based market researcher, Eduventures Inc.
Phoenix Online also garners an outsize share of the industry's revenues -- about one-third of the total. That's because as the market leader, it can charge higher tuition than most rivals. Undergraduates pay a little more than $10,000 a year at Phoenix Online, while students seeking a masters degree pay nearly $12,500. "They're by far the giant in this industry," says Gallagher.
Is the best yet to come? Both Phoenix Online and the broader industry are still in their infancy. "There are 70 million working adults in this country who don't have a college degree," says Cappelli. Increasingly, they realize that they need a degree to get ahead. But because they often have a family as well as a job, studying online is the most convenient solution.
Howard Block, an analyst at Banc of America Securities, predicts "dramatic enrollment growth" for Phoenix Online. He expects that half of the students in post-secondary education will one day make at least some use of the Internet to earn their degrees.
Another plus: Phoenix Online began to tap the international market only about six months ago. So far, "we're bringing in about 500 students a month," says Mueller. "But that's just the tip of the iceberg."
Though Phoenix Online now offers classes only in English, it plans to begin doing so in Spanish and possibly Mandarin as well. Ironically, one of the hottest tech stocks of recent years has done all this with plain-vanilla technology. While other companies charged into online education with dazzling digital content, Phoenix Online offers a text-heavy format that can easily be accessed with dial-up modems.
This might sound like a recipe for failure. But Phoenix Online realized that interaction with humans -- the professor and other students in the class -- was far more important to success than interaction with the digital content. Thus, Phoenix Online keeps its classes small, averaging just 11 students. And to combat the Achilles heel of distance education -- a high dropout rate -- it offers its students plenty of hand-holding, including round-the-clock tech support. The result: 65% of its students go on to graduate.
Some see plain technology as a potential negative for the virtual college. "At some point, Phoenix Online will need to upgrade the sophistication of its platform," warns Trace Urdan, an anlayst with ThinkEquity Partners, a boutique investment bank. That will require more spending on research and development and information technology, he warns, which could crimp margins. Still, any extra spending could be easily offset if Phoenix Online bumped up its class size to 15 students, argues Block. Even with today's small classes, operating profit margins now top 30%.
The biggest concern over Phoenix Online centers on how long it will be listed. "Our intention is to fold it back in to Apollo eventually," says Apollo CEO Nelson. He explains that over time, a blurring of the line between Phoenix Online and students at traditional University of Phoenix campuses will occur as those campuses make growing use of digital technology. But Nelson promises that such a move isn't imminent -- and certainly not over the next four quarters.
Probably, as Phoenix Online balloons in size, its growth rate will slow from the 80% revenue gain it posted in each of the last two years. In the first six months of its current fiscal year, revenues climbed at a slightly cooler pace of 67%.
Still, by today's standards, that still qualifies as a spectacular growth story. "When you see a stock trading at 10 to 15 times earnings, you're lucky if you get 15% earnings growth," says Block. "But Phoenix Online has consistently outperformed estimates that it will grow 30% to 35%, and I think it will continue to outperform." If so, the stock should still have room to fly higher.
Symonds is BusinessWeek's Boston bureau chief