Giving Adtalem an F
Short selling one of the largest for profit universities
What’s Happening in the Market
OpenAI and Common Sense Media announced a partnership to create guidelines and products aimed at promoting sensible AI use among children and teens.
iStoria, a Saudi based ELL education app, just closed $1.3M in seed stage funding. The round was led by Nama Ventures and BIM Ventures, two Saudi VC firms who have made more than 12 investments across the Middle East in the past two years.
What We’re Talking About
Short seller position opened against Adtalem, the for-profit publicly traded company that operates Walden University, and the rebranded version of DeVry. We’ll dig into this later, but Adtalem is a $2 billion blight on higher education: More than 70% of their revenue comes from federal student aid, but they saddle their students with debt for low-quality programs (CNBC)
Elisa Villanueva Beard announced she’ll be stepping down as CEO of Teach for America in 2025. Michael and I were both corps members when TFA was at its peak, reaching about 6,000 corps members in 2013. This past year, TFA had about 2,200 corps members, up 40% from 2022, but still down from 3K in 2019. TFA is one of the best chances we have of exposing young Americans to a life in service, and to the fight for educational equity. The problem is, as we’ve written about in the past, that no one wants to be a teacher anymore. As incredible as Elisa is, I don’t think her next successor will be able to reverse the decline in respect that teachers deserve.
Apple launched their much anticipated Vision Pro for $3,500. They sold 180K in pre-order and analysts expect 500K in sales this year, which is pretty amazing (the iPhone shipped 1.4M units in 2007). The Vision Pro is lightyears ahead of its lower cost rivals, such as Meta’s Quest 3 at $499, and differentiates itself through its spatial computing capabilities. There’s been a lot of talk in recent years about how Apple has become a luxury brand more than a technology company, and that still has merit, but it also obfuscates the fact that Apple has pioneered so many consumer habits we take for granted.
One Big Idea: Breaking up Adtalem
In 1991, DeVry became the first publicly traded education company. Over the past thirty three years, the company has expanded and morphed: In 2017, they rebranded themselves as Adtalem, and then gave away DeVry for free to Cogswell College, a 600-student college. Adtalen went on acquiring a portfolio of for-profit universities and colleges across the US, South America, and the Caribbean. Their portfolio now boasts enrollment of roughly 80,000 learners, similar to their Apollo/PE-backed rival, University of Phoenix (UCLA has about 44K, and NYU 52K).
Last year, Adtalem generated $1.43B in revenue, and their CEO, Steve Beard, netted himself an annual compensation package worth $8M. 70-75% of this revenue came from federal student aid, according to their SEC filing. Walden University, Adtalem’s crown jewel, has a 29% 6-year graduation rate and received about $12M in GI Bill funding in 2021 (pennies compared to the $1.6B in GI Bill funding that the University of Phoenix raked in from 2013 to 2021). In 2023, the federal government forgave $6B in debt for more 200,000 of Adtalem’s borrowers.
Let that all sink in. Tax payers and the federal government are heavily subsidizing colleges that are predatory and some of the worst in student outcomes. More than half of DeVry’s students who enrolled in 2009 had withdrawn by 2010. This is especially egregious when you consider that 52% of Adtalem’s students are people of color, and 81% are women (which they brag about in their annual report).
If we were to categorize their student aid and their GI Bill funding as federal subsidies (which they essentially are), then Adtalem would easily be one of the top 100 largest recipients of federal subsidies (list of subsidy recipients here).
The $1B they receive in annual federal student aid would vaunt them ahead of Bayer ($850M), Goldman Sachs ($800M), and so many others. They’d be right up there in the 50 to 60 largest subsidy recipients, among the likes of Lockheed Martin and Northrup Grumman.
We know Adtalem is awful. Just the worst thing to happen to higher education, period. Safkhet Capital, the firm that opened the short position against Adtalem, cited a few key factors:
Financial mismanagement: At best, the valuation of Walden University at $1.4B was negligent or willfully blind. At worst, they inflated the value. Safkhet claims that Walden should be written down as a loss. For context, Saint Louis University and University of Miami have endowments smaller than $1.4B.
Legal risks: Walden University is the target of an investigation by the DOE into their doctoral program. Scrutiny over their federal student aid program is only going to increase. Walden is under “heightened cash monitoring” because they’ve received $750M per year in graduate student loans alone.
The enrollment cliff: The demographic cliff is going to hit Adtalem’s colleges and universities particularly hard. It already is. DeVry’s undergraduate enrollment peaked at 68K in 2010, and now sits at around 28K. It’s worth noting that Walden still has about 36K graduate students and 6K undergraduate students.
Will the short work?
As you can see in the chart above, Adtalem’s stock hasn’t moved much at all over the past four years. The runup in 2023 was because the company announced a $300M share buyback program.
Adtalem has an EPS of 2.33, up from 2.08 in 2023. Their gross profit was $825M on $1.5B in revenue, which is pretty similar in topline revenue and profit to 2023 and 2022. Adtalem’s fundamentals aren’t deteriorating per se. But they’re so heavily dependent on federal student loans that any scrutiny would demolish their margin, and there is some relevant precedent: Veteran Affairs banned University of Phoenix from accepting new GI enrollments in 2020 after University of Phoenix preyed on veterans to the tune of $1.6B in GI Bill funding.
Get them.