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Instructure (INST +5%) leaps to five-month highs today on a Bloomberg report that KKR (KKR) and Francisco Partners were interested in acquiring the educational software company, taking it private again after a short stint as a publicly traded firm. After being acquired by private equity group Thoma Bravo in late 2019, INST was taken public in 2021, opening at $20/share. Thoma Bravo still controls around 80% of INST shares.

INST's core platform, Canvas, is used across all levels of education, including universities, in numerous markets globally. When taking it public, Thoma Bravo was looking to capitalize on a hot IPO market and the explosion in online learning sparked by the pandemic. However, the pandemic-induced tailwinds never really accelerated. Meanwhile, competition in the educational software market only intensified as companies looked to pounce on the e-learning spike. As a result, Thoma Bravo was shopping INST around as early as May.

With the stock not panning out precisely as Thoma Bravo may have anticipated, the possibility of a deal being reached to take INST private is becoming all the more likely.

• While shares have underperformed major indices since first becoming available to trade, INST's quarterly numbers have been respectable, registering double-digit sales growth in all but one quarter while delivering consistent profitability. In March, INST outlined its medium-term growth targets, projecting a +5-10% growth rate for its core products on an ARR basis and a +10-15% rate for its growth products, culminating in a +9-11% organic growth rate overall.
• Given the multitude of competitors in the market, INST's medium-term goals were commendable. Tech titans like Alphabet's (GOOG) Google Classroom to firmly-established names like Blackboard operate in the same market, each looking for a slice of a pie that is essentially fixed as the number of learning institutions stays relatively flat yr/yr.
• INST's total addressable market was recently bolstered by the acquisition of Parchment, which opened the door to an estimated $2.0 bln in possible revenue. Parchment's platform enables schools to securely issue transcripts, diplomas, etc., digitally, a critical feature in an increasingly digital world.
• As a software company, INST's margins are strong. As of last quarter, INST boasted adjusted operating margins of 40.8%, a 420 bp improvement yr/yr. Additionally, the company's recurring gross margins are above 80%. Management also commented that AI could bring further internal improvements.
  • Speaking of AI, INST noted in June that it is being thoughtful about how it introduces AI into the classroom. The company is still running tests to determine if customers would be willing to pay for AI. With the technology still in the experimentation phase, INST is not aggressively pursuing it just yet, at least not externally.

With INST possibly returning to being a privately held organization, its upside is likely capped. However, the company commands several competitive advantages and compelling fundamentals, which could allow it to command a high price tag. As such, INST is worth a look.