D2L is a Top Pick for 2023, says Eight Capital

Investment bankers Eight Capital is staying bullish on D2L Inc (D2L Inc Stock Quote, Charts, News, Analysts, Financials TSX:DTOL), with analyst Christian Sgro maintaining a “Buy” rating on the stock in a Tuesday report. 

Eight Capital recently hosted marketing meetings with D2L CEO and Board Chair John Baker and interim CFO Josh Huff, with Sgro saying a key topic of discussion was D2L’s push to profitability. Management walked Sgro through its proposed path for the learning management system (LMS) company, pointing to three aspects.

First up was cost of sales, where the company said it continues to realize benefits from cloud optimization, according to Sgro.

“We expect that this and streamlined professional services can drive gross margin percentage through the target model and into the low 70 per cent range in the medium-term,” Sgro said.

Next, D2L is aiming to gain efficiencies from transitioning its teams from market entry to penetration, and finally, management sees the one platform and one R&D team as eliminating the risk of any redundancy or uncoordinated efforts.

“The company has a single R&D team for its unified Brightspace platform, where we see operating leverage with scale,” Sgro said.

Another highlight for D2L, according to Sgro, is the company’s recent launch of its Creator+ add-on, which has so far had a warm reception from customers, and the analyst thinks it will benefit Net Dollar Retention for D2L.

More broadly, Sgro wrote about market trends in the LMS environment, saying post-secondary enrolment rates have been on the decline in the US for years but a softening in the labour market could have a countering effect as students return to school in greater numbers. The analyst also noted that colleges are looking for alternatives to traditional learning models, particularly with hybrid formats, and are seeing value in competency-based learning.

“As pandemic headwinds subside, the company has noted that RFP activity and sales cycles are returning to normal,” Sgro said. “While stagnant enrolment rates may not drive student volume growth, increased spend is supported by contracted price escalators (ex. CPI adjustments) and upsell opportunities (ex. more campuses or modules). 

“We have seen recent proof points in the UK market. Higher ed membership organization UCISA reported that 53 per cent of institutions are planning to review their Technology Enhanced Learning platform in the next two years. D2L Brightspace currently has seven per cent market share in the UK,” Sgro wrote.

“As conditions stabilize in the US, we see a similar recovery in RFP activity as institutions re- evaluate their LMS needs post the pandemic,” he said.

Sgro paired his “Buy” rating with a maintained C$11.00 target price, representing at press time a projected one-year return of 38 per cent.