Nelnet Shows Some Skin
The Annual Letter Reveals Some Juicy Details
“It’s no secret that Nelnet is complex as we continue to diversify. Our financials reflect short-term “book” gains and losses, and we think and operate using a long-term horizon. Because of this strategy, many areas of value do not appear on today’s financials—but we are confident they will down the road as we continue to play the long game.” Nelnet CEO Jeffrey Noordhoek
Nelnet’s (NYSE: NNI) book value has grown 17% compounded annually since it went public in 2003 and it has never had a year in which it lost money. It is one thing to say a company has grown book value by 17% a year, it is another thing to see it. Here is a visual representation of Nelnet’s book value growth:
But here is the most amazing thing: Nelnet is still undervalued, as it still trades near its book value. And it is especially undervalued because the book value understates the true value of its owned businesses, investments, and holdings.
Just as the quote above says, Nelnet management doesn’t concern itself with the short-term impact of decisions, only focusing on the long-term value. This leads Nelnet to make investments that sometimes require the company to book losses or charges upfront and sometimes its quarterly earnings can be lumpy.
Nelnet’s CEO Jeffrey Noordhoek called this out in his letter to shareholders in the company’s annual report. He wrote: “Although, in certain circumstances, the accounting rules require we book upfront losses on these investments, we know we’re creating real long-term value. This can adversely impact near-term GAAP earnings and create choppiness in our year-to-year earnings, but we are bullish and excited about the prospects for these businesses.”
And it is the 2022 annual letter that I want to highlight. It is here where the company disclosed material information that is key to understanding just how undervalued the company could be. Noordhoek shared very specific examples of how the value of the company’s investments on the books are artificially low. I want to highlight three of the disclosures that make me very bullish about the future for Nelnet, but I highly recommend you read the entire letter to understand how management thinks.
ALLO
Nelnet built a fiber optics company called ALLO from scratch and then sold half of it to a private equity firm that specializes in telecom. They retained a 45% stake in the company and Nelnet holds this investment on the books as a $68 million valuation. This value is artificially low, because as ALLO grows, accumulated losses have flowed through from ALLO to Nelnet, and Nelnet has had to “book” $114 million of losses due to ALLO. Losses have flowed to Nelnet because of the way they structured their investment in a very interesting and tax efficient way.
So, what is Nelnet’s stake in ALLO actually worth? Well, in the letter, Noordhoek shared that ALLO now has over 131,000 lines and growing. These high quality, low churn customers should be worth approximately $7000 a line. If we were to assume that the new venture has $200 million in debt, the total equity value of ALLO should be approximately $717 million and Nelnet’s true value is $322 million and growing fast, not $68 million. That would mean an additional $7 per share of value above Nelnet’s book value.
Solar
Nelnet has been investing in renewable energy tax credits and solar generation. In the annual letter, Noordhoek shares that the company has invested $175 million, but due to the way they have it structured and how accounting rules work, they carry this investment at a negative $55 million value. In the letter, Noordhoek says they should not only get back the $175 million, but an additional $38 million plus they would also generate an additional $73 million in income over the life of this investment.
Even not counting the income stream, this would add over $7 per share to Nelnet’s book value. I expect Nelnet to continue aggressively growing this business in the future and am excited to see how fast they can grow it.
HUDL
HUDL may be the best example of upside to Nelnet’s true value. When I last wrote about HUDL in September of 2021, I called it the TikTok of the sports world.
Here is what I said:
Imagine a company with a technology service that 98% of all US high school football teams, 80% of high school soccer teams, 29 of 30 NBA teams, almost 70% of the MLS teams, and half the NHL use. Internationally, every soccer team in the English Premier League, most of the other major European soccer leagues, the Chinese Basketball Association, and more, are also users.
Let me introduce you to HUDL, the leader in video, data analysis and streaming for collegiate and high school athletics in this country. HUDL is positioned to become the TikTok of the sports world in the sense that they arm athletes, coaches and teams with video, data, and the tools to analyze, cut and post anything anywhere.
When I wrote that post, 180,000 teams used HUDL. Now, according to Nelnet’s letter it is more than 200,000 teams globally using HUDL. Even more impressive is that HUDL had launched its own camera system to help teams automate recording video of games and practices. When I wrote it, 150 cameras had been installed. Imagine my surprise when 18 months later, 150 cameras has turned into over 14,000.
The Nelnet annual letter also shared that HUDL made three key acquisitions. They already dominate the industry; this just takes their dominance to another level. Since HUDL is private, there is very little new information about the company so these tidbits of information are gold.
So, what is HUDL worth?
HUDL’s pricing for its typical high school sports package is in the $1500-$2000 a year range. Let’s assume that the average team spends $2000 a year on HUDL (which feels absurdly low considering how many professional teams use their software and how expensive that has to be). Then that would mean that HUDL has $400 million of recurring revenue in a recession proof industry with little or no competition. What is that worth? 7 times sales, 10 times sales, or more? At 7 times sales, HUDL would be worth $2.8 billion and Nelnet’s stake of 20%, would be worth $560 million versus its carrying value of $134 million. That would add another $11.50 per share of additional value to its book value.
And here is the kicker, HUDL could easily be worth more than $5 billion or more, and its value keeps growing. Maybe this is why Nelnet bought more shares in a private secondary sale last month.
Summary
The above are just three of the many examples I could have used to share how undervalued Nelnet is. I could have easily written about Nelnet Business Services, its payment processing and education technology division that is wholly owned. This business is growing and spits out tons of cash flow and has 40% market share of all private k-12 schools.
Or I could continue to write about the avalanche of cash that will be flowing onto Nelnet’s balance sheet as its student loan book is in runoff.
I currently think Nelnet is easily worth $140 per share and that value is growing every year. In three years with continued growth in HUDL, ALLO, NBS and other investments, and mixing buybacks, Nelnet’s net asset value could easily top $200 per share.
Why and how this company trades near book value is a mystery to me. Maybe it’s the lack of analysts, maybe it’s the complexity. Whatever the reason, I continue to be shocked more investors aren’t studying Nelnet, its track record of success or reading its annual letter. For a long-term investor like me, Nelnet just showed me some skin and I like what I see.