Nelnet: Flying Under The Radar (Issue #34)

Background

Most of you have probably never heard of Nelnet before. It is a ~$3.3bn market cap company run out of Lincoln, NE, but it is not a company to be underestimated. Similar to Boston Omaha they have multiple branches and ventures. These branches include (but are not limited to) things like Loan Servicing, Payment Processing, Real Estate, Renewable Energy, Educational Technology, Banking, and Asset Management. Each one is interesting, a strong company in its own right. Together they created a heavily underestimated company that has a lot of growth potential.

Nelnet is a very private company. They don’t want to be known by anyone, Chit Chat Money did a podcast on them and the CEO asked them where they heard about Nelnet. There aren’t many publicly traded “stealth” companies, but Nelnet comes close. Despite the multi-billion dollar valuation, the company continues to fly under the radar of most. This is a product of the company shying away from the spotlight. Management purposely does this because it saves them money in marketing as well as keeping them from being as involved in the mania side of the stock market. Nelnet is the infrastructure behind many important parts of our world today. It is a very financially and structurally solid business. It is made more enticing by its lack of effort to be attractive to investors that only take preliminary looks into companies. This means their investor base understands the company at a deeper level making it a more stable investment for the most part.

Nelnet is utilizing a similar strategy to John Malone and Liberty Media when it first spun off from TCI. Malone purposely made Liberty Media seem unattractive and complex to discourage public investment. However, as it grew the company's true value and power became apparent. If Nelnet continues its current trajectory a similar event is likely to happen.

Loan Servicing and Systems

This branch services the student loans held under the Assets Generation and Management branch of Nelnet. Loan Servicing and Systems also services government-owned student loans and FFELP loans.

There was $486m in revenue in 2021 for Nelnet which is directly from Loan Servicing and Systems. However, this branch as a whole had a combined $660m in income between interest income, loan servicing and systems, intersegment revenue, and other income. This is a relatively high-cost area of Nelnet. The majority of the revenue is used to pay salaries of employees.

Education Technology, Services and Payment Processing

Otherwise referred to as Nelnet Business Services (NBS), this part of Nelnet is quite interesting. Payment processing is not a unique industry, most of us interact with it daily. However, NBS only does academic payment processing. This means they process tuition payments for private schools as well as colleges. They make money the same way as any other payment processor–charging a fee on the transaction–but since these are usually for tens of thousands of dollars the fees are much more significant (~$100). Even my college (Babson College) uses NBS as a payment processor. This makes making payments a little sweeter.

Nelnet has chosen a specific portion of the payment processing market which means NBS has virtually no competition. The company has 40% market share of US private K-12 schools and 30% market share of higher education institutions. NBS serves more than 11,500 K-12 schools and over 1,300 Colleges and Universities. These services include payment processing, grade book management, and attendance and financial management for schools.

On top of this, Nelnet operates in a few other verticals including Nelnet Community Engagement which, “Nelnet Community Engagement provides faith community engagement, giving management, and learning management services and technologies. Nelnet Community Engagement serves customers in the technology, nonprofit, religious, health care, and professional services industries.” As said in the 2021 Nelnet Annual Report.

Education Technology, Services and Payment Processing made ~$338m in revenue in 2021. In 2021 the split between Tuition Payment Plan Services, Payment Processing, and Education Technology and Services was pretty even. However, Education Technology and Services has almost doubled since 2019 from $58m to $105m in 2021. Meanwhile, Tuition Payment Plan Services revenue has stayed flat just above $100m and Payment Processing has been steadily growing to $127m

Communications

ALLO Communications provides homes and businesses with fiber optic internet, television, and telephone. The company mainly operates in Nebraska and Colorado. The company had revenue of $78.7m in 2021 despite having ‘increases from investments’ of $91m that same year. Approximately three-quarters of this revenue comes from residential services and the remaining quarter comes from business services.

Asset Generation and Management

This branch of Nelnet is involved with a few different industries. Everything from investments in other companies to student loans is under the jurisdiction of this branch. Asset Generation and Management accounts for ~$507m of the company’s revenue from 2021. This does not include income from the sale of loans or other assets.

When it comes to student loans there is the question of what happens if student loans are forgiven by the government. In this case, Nelnet gets a check for their full loan portfolio which is currently worth $17.4bn. This does not include the loans owned by Nelnet Bank some of which would also be paid off as well. The income from interest on the non-Nelnet Bank loans is one of the company's largest sources of revenue.

This company has truly flown under the radar, but the companies it controls and has in the past are quite well known. For example, Nelnet owns 19% of Hudl–a high school sports highlight app–popularly used nationally. Hudl is worth over $1bn making this a sizable holding for Nelnet, the Hudl CEO is even on Nelnet’s board. Nelnet started Hudl with $100k and since has brought on other investors and grown it to its now unicorn valuation and over 2,300 employees.

Nelnet invests in and operates over 35 other companies which all could be “the next Hudl.” This is not dissimilar to Alphabet’s/Google’s Other Bets branch.

Nelnet Bank

Nelnet Bank is an internet bank headquartered in Salt Lake City, UT that focuses on student/academic loans. Many of these were purchased from Wells Fargo’s legacy private student loan portfolio in 2020. Since then the bank has issued just under $9bn in bonds through its student loan securitization platform. After a full regroup on the bank’s strategy in 2020 the parent company (Nelnet) made a 3-year plan for the bank to become profitable and expand. The bank is currently in year 2 of that plan and received a $100m investment from the parent company of $55.9m in cash and $44.1m in student loans.

Nelnet Bank brought $7.7m in revenue to Nelnet as a whole in 2021. The bank operated at a loss in 2021, but the bank just took on new assets and is still growing. I don’t see this becoming one of the biggest pieces of Nelnet, but it will definitely become a more meaningful piece. This year Nelnet Bank will officially represent 400 college and universities loans and financial aid loans.

Nelnet has a revenue of $1.6bn between Loan Servicing and Systems, Educational Technology, Services, and Payment Processing, Communications, Asset Generation and Management, and Nelnet Bank. There are a few other branches of Nelnet that would make this figure higher, but this accounts for the vast majority of income for the business.

Nelnet has been increasingly investing in its future growth (see below). There have been large investments across almost all their branches and ventures. The most notable and largest investments have been in Real Estate, Renewable Energy, Debt Repurchases, and Loan Acquisitions. Those three branches alone account for just under $3bn and more than half of all the company’s capital deployments.

Source: Nelnet 2021 Annual Report

Looking forward I will be looking to see how/if Renewable Energy and Real Estate become more meaningful revenue streams for the company as well as how Education Technology and Services grows (i.e. at what growth rate, returns, etc.).

Valuation

Nelnet has been consistently growing its dividend and at the same time conducting sizable buybacks. The company repurchased $78.9 million shares in the first half of this year alone. This is more than any other year although there have been annual sizable buybacks historically.

Based on communications industry standards of a 1.5x Price/Sales ALLO is worth an estimated between $118-$136m. 

Using a 1.3x Price/Book calculation Nelnet Bank is estimated to be worth ~$134m. This provides a tiny portion of the company’s revenue. If we extrapolate a total company valuation from this value then we can estimate Nelnet to be worth ~$7.5bn.

Investment Thesis

First off since 2004 the company has grown book value per share at an average of 17.2% annually meanwhile market value has only increased at an average rate of 9.8% annually. This creates a major discrepancy between price and value. This discrepancy creates an enticing opportunity for investors. On top of this, the company is already operating at an undervalued valuation. Nelnet is already doing well, but the company is constantly working and deploying capital to grow and expand its current businesses as well as develop new ones.

Until Sunday,

Soren

Disclaimer: Soren Peterson and Pillars And Profits Newsletter are not responsible for any investment results. This is not financial advice. Always do your own research.