LRN - Stride: Empowering Growth Amid Rising Demand For Alternative Education

2023-10-31 08:40:48 ET

Summary

• Stride, Inc. reported an 8% increase in enrollments for its fiscal Q1 2024, demonstrating the demand for online education.
• Career-focused programs and changing legislative landscape contribute to Stride's growth.
• Strong financial performance and positive outlook indicate a promising future for Stride in the education technology sector.

Stride, Inc. ( LRN ) has recently seen historically high trading levels following the release of its fiscal Q1 2024 Earnings report (calendar Q3 2023), surging by 22.5% over the last week. As the educational landscape undergoes rapid evolution, companies like Stride stand at the forefront of this transformative change. Demonstrating a trend of surpassing revenue and EPS expectations for the past three quarters, the company has commenced FY2024 on a strong footing.

While a high short interest at 10.75% and uncertainties regarding the economic environment's impact persist, my bullish stance remains firm due to the surge in enrolments and the robust financial performance. These factors highlight the escalating demand for adaptable and individualized education, driven by the tailwinds of increased dissatisfaction with traditional education and growing legislative support for alternative educational platforms. Hence, I maintain a positive outlook on this stock.

Stride Overview

In my prior article, I presented an overview of Stride . The company offers an alternative full-time core education for children, high school students, and adults using virtual and blended learning services. Stride generates revenue through two primary streams: General Education and Career Learning. The latest report for Q1 2024 indicates substantial double-digit revenue growth and increased enrolment in both streams compared to the previous year.

The full-year forecast is exceeding expectations, with the company anticipating a robust FY2024 primarily due to a significant surge in enrolment numbers. Expected revenue falls from $1.96 billion to $2.03 billion. Additionally, the projected adjusted operating income spans from $250.0 million to $275.0 million. Furthermore, the anticipated capital expenditures are estimated to range between $65.0 million and $75.0 million, focusing on property and equipment purchases, as well as capitalized software and curriculum development costs.

Growth Drivers

Stride offers an increasingly popular alternative to traditional education, gaining significant momentum. The market share for K-12 alternative education is projected to grow at over 29% until 2024. Stride experienced an 8% rise in fall enrolments, reaching nearly 188,000 students, highlighting the increasing demand for online education, particularly amidst challenges in traditional public education. Moreover, Stride's career-focused programs, engaging over 70,000 enrollees, have gained traction among students and parents, aiming to equip students with future career skills and address the skills gap for employers. An important factor is the changing legislative landscape, where bipartisan support for school choice is increasing as more parents seek schools tailored to their children's needs, driven by dissatisfaction with K-12 education . This growing sentiment at the legislative level further supports Stride's mission.

Financial Update

Stride has consistently exceeded EPS and revenue expectations for three consecutive quarters. In Q1 2024 , Stride showcased robust financial performance, reporting revenue of $480.2 million, marking a 13% increase from the corresponding quarter in the prior year. Notably, revenue has been on an upward trend over the last five financial years. The company's gross margins improved to 36%, exhibiting a 550 basis point increase from the previous year, and Stride anticipates further enhancements over the course of the year.

When reviewing the company's Adjusted Operating Income of $14.8 million, it's notable that there's been a year-on-year improvement compared to an adjusted operating loss of $19.9 million. Additionally, in Q1 2024, the EPS demonstrated a positive increase of $0.65, reaching $0.11 per share. It's evident that the bottom line has shown growth over the last decade.

Analyzing the company's financial standing, it appears pretty robust, with a cash reserve of $254.6 million. Additionally, it has a $100 million revolving credit facility available while holding a total debt of $478.2 million. The company's leverage ratio stands at a modest 0.67x. Furthermore, its capital expenditures amounted to $16.1 million, showing a decrease from the previous year. In terms of levered free cash flow, the last twelve months demonstrate a positive $146.1 million, indicating a history of generating positive cash flow, though not consistently annually.

LRN Stock Valuation

Stride has seen a remarkable upward trend in its stock this year, soaring by 66.84%. Wall Street analysts rate the stock at 4.2 as a Buy, and it's currently trading below its average price target of $61.00. When compared to its market peers, such as Chegg, Inc. ( CHGG ) and 2U, Inc. ( TWOU ), Stride seems relatively pricier based on its price-to-sales ratio of 1.18.

Looking at growth, Stride is the only one showing strong double-digit year-over-year growth. The company is expected to reach between $1.96 billion and $2.03 billion in revenue for the year, with an estimated operating income of $250 million to $275 million. This steady growth indicates a positive outlook for investors.

Risks

Despite Stride's significant growth, it's important to note potential risks. Short interest has increased since my previous article earlier this January, indicating increased negative sentiment. Furthermore, changes in education policies could affect its operations, while increased competition in online education presents a challenge with multiple players seeking market share. Additionally, technical issues or cybersecurity threats could disrupt online learning, affecting how efficiently Stride delivers its programs.

Final Thoughts

Stride showcased robust performance in Q1 2024 and has provided a positive outlook for the year ahead. Despite the high short interest, signaling potential negative market sentiment, Stride's exceptional results compared to industry peers are evident. Moreover, it capitalizes on the rising discontent with conventional education and an increasingly supportive legislative environment favoring alternative education. As the company achieves record-breaking results, despite the stock price lingering below its average target, investors might consider adopting a bullish stance on this stock.

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