The Covid-19 vaccine rollout is under way, and 2021 could be the year when this pandemic comes to an end. Therefore, educational institutions such as schools and universities may soon be reopening, which is excellent news for one FTSE 100 stock that I’m watching. Let’s take a look.
A FTSE 100 giant in education
Pearson (LSE:PSON) has a pretty interesting history. What started out as a construction company during the industrial revolution has transformed itself into an educational publishing powerhouse.
Today the business provides educational content, assessments, and digital learning services to schools and universities. Anyone who’s ever ordered or used a school textbook has probably had a Pearson product pass through their hands.
The stock has recently shifted its strategy to focus more on digital content. In the most recent annual report, 66% of revenue was generated from digital materials, compared to 59% in 2017. But why does this matter?
Digital content is much cheaper to distribute and update, thus leading to improved profit margins. A closer look at the financials provides evidence to support this. If exceptional expenses are ignored, the business’s underlying profit margin has been steadily increasing from 8.9% in 2017 to 12.4%.
The impact of the pandemic
Covid-19 has certainly had a notable impact on the firm. As mentioned, many educational facilities remain closed. Combining this with exams cancellations and general economic pressure on spending, Pearson saw a 10% decline in overall revenue in 2020.
However, what’s encouraging is its online learning platform saw an 18% increase in customer spending due to new subscriptions. Whether these subscriptions will be retained once schools and universities open again is yet to be seen. But it has exposed Pearson’s digital products to more institutions, which I believe has accelerated their adoption and could attract additional subscriptions in the future.
The FTSE 100 stock is far from risk-free
Because Pearson operates at the heart of the global education system, institutions often rely heavily on it to deliver learning materials, tests, and assessments. Any delays or disruptions will have a significant impact on the firm’s brand and reputation that could be exploited by competitors.
But that’s not the only threat to its reputation. There will always be individuals who try to cheat at school. And in 2019 Pearson’s security was breached. Its Mathematics A-Level exam was leaked shortly before it was to take place nationwide. The firm did fix the flaw in its cybersecurity. But any future breaches will likely give Pearson a reputation for poor security, subsequently leading to a steady decline in market share.
The Bottom Line
To me, Pearson looks like it could be in for a long-overdue boost to its business. As educational institutions begin to reopen, the demand for the stock’s products and services could surge. At least that’s what I think.
Therefore, Pearson is definitely a stock to watch in my eyes. And if digital content adoption continues to grow, even after the pandemic has ended, then it may become a fantastic addition to my growth portfolio.
Zaven Boyrazian does not own shares in Pearson. The Motley Fool UK has recommended Pearson. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.