McGraw Hill's Undervalued Position in the Education Sector Amid AI Disruption

The education sector is undergoing a seismic shift, driven by artificial intelligence (AI) and the global push for digital learning. Amid this disruption, McGraw Hill (NYSE: MH) stands out as a compelling investment opportunity, offering a rare combination of a resilient business model, a deep competitive moat, and a valuation that appears significantly discounted relative to its peers. With top-tier analysts from Macquarie to Deutsche Bank converging on the stock as a “Buy” or “Outperform,” the case for McGraw Hill is rooted in its strategic pivot to AI-driven education, robust financials, and a valuation that defies its growth trajectory.

A Valuation That Defies Logic

McGraw Hill's current valuation metrics tell a story of underappreciated potential. As of August 2025, the company trades at an EV/Revenue multiple of 2.6x and an EV/EBITDA multiple of 8.1x, far below the sector average. For context, peers like Cengage and Pearson trade at EV/EBITDA multiples of 12.5x and 14.0x, respectively. Even within the Education & Training sector, where the median EV/EBITDA is 7.9x, McGraw Hill's 8.1x multiple suggests a slight premium to the industry average—yet this ignores the company's superior margins and recurring revenue streams.

The disconnect is stark when considering McGraw Hill's financial performance. The company generated $2.1 billion in revenue and $669 million in EBITDA in the last fiscal year, with an 80.11% gross margin and a 32% EBITDA margin. These metrics, combined with a Price-to-Sales (P/S) ratio of 1.2x (well below the peer average of 2.3x), highlight a stock that is trading at a discount to its intrinsic value. Analysts like Macquarie and Rothschild Redburn have priced this discount into their targets, with the latter suggesting a 115% upside potential to $28.60.

A Competitive Moat Built on AI and Recurring Revenue

McGraw Hill's undervaluation is not a reflection of its fundamentals but rather a failure to fully price in its long-term growth drivers. The company's digital-first strategy, anchored by AI-powered platforms like ALEKS, SmartBook, and AI Reader, is transforming how students learn and how educators teach. These tools leverage adaptive learning algorithms to personalize education, a critical differentiator in an era where one-size-fits-all models are obsolete.

The company's Remaining Performance Obligation (RPO) has grown by 47% over six years to $1.7 billion, driven by high-margin digital subscriptions. In 2025, digital billings surged 18% to $972 million, now accounting for 61% of total revenue. This shift to recurring revenue creates a sticky business model, with 46% of higher education billings coming from the Inclusive Access program—a cost-effective digital solution that locks in institutions and students.

Moreover, McGraw Hill's AI-driven R&D investments are deepening its moat. The company has established innovation hubs in Boston, San Francisco, and Israel, focusing on generative AI tools like the AI Reader, which enhances comprehension by re-expressing content in multiple formats. These innovations are not just incremental improvements but foundational shifts in how education is delivered, positioning McGraw Hill as a leader in the $2.65 trillion global K-12 market.

Strategic Valuation Arbitrage in a Resilient Sector

The education sector is inherently resilient, with demand for learning solutions remaining stable even during economic downturns. McGraw Hill's recession-resilient revenue streams—driven by K-12 and higher education—further insulate it from macroeconomic volatility. In 2025, the company's K-12 segment grew 24%, while digital billings expanded 26%, demonstrating the scalability of its digital platforms.

The valuation arbitrage opportunity lies in the contrast between McGraw Hill's conservative multiple and its growth potential. While the company's EV/EBITDA of 8.1x is lower than peers, its EBITDA growth of 29% in 2025 and 35% EBITDA margin guidance for 2025 suggest that the market is underestimating its ability to sustain high-margin expansion. Analysts like William Blair and Morgan Stanley have highlighted this gap, noting that McGraw Hill's $30 billion market opportunity in education content is only beginning to be tapped.

Risks and the Path Forward

No investment is without risk. McGraw Hill's reliance on cyclical K-12 adoption cycles and the saturation of digital education markets pose challenges. Additionally, the rise of free AI-generated content could erode its proprietary offerings. However, the company's diversification into professional education—such as medical training via Boards & Beyond—and its global expansion into high-growth regions (e.g., the Middle East and Latin America) mitigate these risks.

The IPO in July 2025, which raised $414.6 million, has provided the company with flexibility to repay debt and reinvest in R&D. With a net debt of $2.8 billion, the balance sheet is not pristine, but the strong free cash flow yield and high EBITDA margins provide a buffer for deleveraging.

Investment Thesis: A Buy for the Long-Term

McGraw Hill's combination of undervaluation, AI-driven innovation, and recurring revenue makes it a standout in the education sector. The analyst consensus—from Macquarie's 42% upside to Rothschild Redburn's 115% upside—reflects confidence in the company's ability to capitalize on the AI revolution in education. For investors seeking a strategic valuation arbitrage opportunity, McGraw Hill offers a compelling entry point into a high-margin, resilient industry.

Actionable Advice: Investors should consider initiating positions in McGraw Hill, particularly as the company continues to execute its digital transformation and deleveraging strategy. The stock's current valuation discounts its long-term potential, making it an attractive buy for those with a 3–5 year horizon.