PowerSchool Stock: Leading Player In The K-12 SIS Industry (NYSE:PWSC)

Thesis highlight

PowerSchool Holdings, Inc. (NYSE:PWSC) has 15% upside. It is a leading player in the K-12 education sector. The company serves multiple school districts and has heavily invested in the compliance and reporting capabilities of its student information system solution, allowing it to serve multiple districts across the U.S. and Canada.

In addition to its student information system, PowerSchool offers a range of mission-critical solutions for K-12 institutions, including applications for administrative and classroom processes. The company’s back-office software is typically more difficult for schools to switch away from due to the amount of data and processes that are integrated into it. As schools continue to undergo digital transformation and prioritize data-driven approaches to education, PowerSchool’s offering of a consolidated platform for managing and analyzing data is likely to be in high demand.

Company overview

PowerSchool is a cloud-based software suite for the K-12 education sector, containing applications for both administrative and classroom processes.

Schools are undergoing digital transformation

The primary and secondary school sector is an important part of the American economy and a major vertical end-market worldwide. The quality of the education system determines the standard of living and economic prosperity of a nation, thus it is not surprising that the United States spends hundreds of billions of dollars annually on elementary and secondary education. But a healthy ecosystem of participants, with their own individual requirements, possibilities, and challenges, is necessary for the success of K-12 education.

Cloud-based software is helping schools enhance collaborations, communications, and courses; analytics are being used to expose educational information; and operations are being automated, all of which contribute to the dynamic digital transformation that is currently taking place in the world of education. I think cloud systems are becoming more appealing to educational institutions because of their low entry cost, scalable and secure data policies, and simplified setup.

In my opinion, redesigning the K-12 education experience for kids, teachers, parents, and administrators will require a data-driven approach to education. The promise of digital transformation, workplace optimization, and student achievement is being realized through real-time collaboration and interaction, sophisticated insights, and rich data management. Institutions of higher learning increasingly generate copious volumes of data due to their awareness of the field’s growing importance; nonetheless, this information is typically wasted due to its storage in isolated silos and nonstandard forms. Disconnects between data creation, storage, and analysis limit the worth of collected information. To further facilitate the implementation of data-driven education initiatives, PWSC Unified Platform connects technologies and data to support teachers and school leaders.

This is crucial because it makes possible the consolidation of previously inaccessible data sources. Creating individualized lesson plans based on student performance data, and overseeing staffing and professional development enhancements with PWSC’s talent solutions, are just two examples of how real-time data may enhance otherwise inefficient procedures.

PWSC is a leading player in the K-12 industry that offers mission critical solutions

Over 70% of students in the United States and Canada are enrolled in a district that employs at least one PowerSchool product, establishing PowerSchool as the market leader in the K-12 education back-office software field, as stated in the prospectus. PowerSchool serves 93 of the top 100 school districts in the United States (according to the prospectus as well), giving the company an even stronger competitive position at the big district level.

PWSC has been able to establish such a dominant position in the student information system [SIS] market because many incumbents in the industry are hampered in their growth by the difficulty of adapting to ever-evolving federal, state, and municipal rules. In addition, in order to achieve scalability and market leadership, PWSC has heavily invested in the compliance and reporting capability of its SIS solution, which has allowed it to serve multiple districts in U.S. states and Canadian provinces. Further, PWSC provides a full spectrum of cloud solutions for K-12 institutions, including many that are essential to their operations. PWSC cloud apps are founded on the PWSC SIS, which is the backbone of K-12 institutions by centralizing student data and processes to fuel clients’ essential functions. In addition to the SIS, PWSC delivers a full spectrum of mission-critical solutions that districts need to manage their operations, employees, and instruction.

Back-office software applications are often stickier than front-office software applications due to the extensive interconnection between products and the mission-critical nature of many of these systems (as mentioned above). PowerSchool also provides robust connectors between its many product offerings, including its HR operations and ERP back-office solutions. Since they store so much information, these systems are indispensable and difficult to replicate.

Flywheel effect as PWSC scales

The PWSC student information system is a treasure trove of data and insights about PWSC’s student body. Its ability to gather, analyze, and benchmark data is invaluable for informing policy and funding decisions that have far-reaching effects on students’ lives. To better comprehend what factors contribute to student achievement, PWSC uses data analytics, AI/ML, and in-depth modeling. PWSC’s proprietary engine for churning out additional insights, in my opinion, will provide it a major advantage over competitors as the company expands and the sector gets more digitalized (i.e., more data can be collected and exploited). PWSC would be able to create higher-quality products if it had a deeper familiarity with the requirements of educational institutions and their students.

PWSC could extend its reach to the entire K-12 ecosystem

PWSC is able to enhance its cloud solutions, increase its reach, and give more value to customers because to the partnerships it has established with best-in-class providers across the K-12 ecosystem. PWSC is a vital part of the core user system, thus I have faith that it can pull it off. I believe PWSC is the de facto standard, and many cutting-edge point solutions and apps want to integrate with it. Helping partners get their products out there is a key aspect of PWSC’s ecosystem strategy for building partnerships, and this support can take many forms such as API licensing. Through API licensing, third-party developers can access PWSC’s secret API and use it to facilitate custom data integration between their solutions and PWSC’s. Customers and constituents benefit from the enhanced functionality as a result. I see PWSC’s concept as a win-win because it can increase its revenue as its partners expand. PWSC often charges its partners annual fees that increase in line with the partner’s success in bringing in new customers.

Plenty of opportunities to cross-sell products to existing base of users

PWSC has established a strong foothold in a large number of K-12 institutions in the United States and Canada. Given that the typical customer use only two modules, I believe there is a lot of untapped potential among the firm’s current clientele. More importantly, COVID has shown that the K-12 education ecosystem needs to digitize and automate workflows, which has boosted digital adoption in K-12 software. It’s conceivable that this will increase portfolio-wide uptake even further.

Valuation

My model suggests a price target of $26.05 in FY23, representing a 15% upside. This assumes modest revenue growth in the near-term, and the forward EBITDA multiple should be 26x in FY23e.

Given the strong secular trend for digitization, I believe PWSC will be able to grow over the long-term, steadily, while maintaining its leadership position. I believe PWSC marketing leading position warrants the high multiple that it is trading at (26x forward EBITDA), but I also do see a chance of negative re-rating if PWSC show signs of losing share. That said, until there are near-term negative catalysts in sight, I think PWSC can continue to trade at this level as it grows.

Risk

Competition in many end markets

PowerSchool may be the dominant K-12 SIS on the market, but it faces stiff competition in many other industries. For instance, the K-12 LMS market has a lot of untapped potential. When it comes to commercial K-12 learning management systems, PowerSchool’s main rival is Instructure, which is currently the market’s only other fully-featured option.

Conclusion

PWSC is a leading player in the K-12 education sector for SIS. Having invested extensively in the reporting and compliance capabilities of its student information system solution, the company now serves various school districts across the United States and Canada. PowerSchool’s integrated platform for managing and analyzing data is likely to be in high demand as schools continue to undergo digital transformation and promote data-driven approaches to education.