LRN - Stride Inc.: An Educated Growth Choice

2023-07-31 18:04:46 ET

Summary

• Stride Inc is a leading education technology company providing online learning solutions primarily for students up to K-12.
• The e-learning industry is experiencing rapid growth, with the global market expected to exceed $680B by 2030.
• Stride's enrollment, revenue, and profitability have been steadily increasing, with strong cash flow and a strong balance sheet position.

Thesis

E-learning has been one of the main emerging trends, following the spread of the Covid-19 pandemic in 2020. While the pandemic provided the e-learning industry with accelerated growth, Stride, Inc. ( LRN ) has been one of the pioneers of online, leveraging their over 20-year experience. In the current market environment, I think Stride is well positioned to succeed following the path that the company's management has successfully remapped over the past few years.

Business Model

Stride Inc is a leading education technology company, centering its unique business model around providing online learning solutions primarily for students up to K-12. Stride offers a comprehensive range of product offerings and services that cater to the diverse needs of students, parents, and educators. These offerings include, among others, virtual schools, curriculum and online technology platforms designed to enhance the overall learning experience. Stride's virtual schools allow students to access accredited education remotely, providing flexibility and personalized learning paths for each individual. Through the company's offerings, students can gain exposure to different learning formats and interactive tools (data analytics, assessment features and more).

Industry Growth

Propelled to faster growth by the spread of the Covid-19 pandemic, the e-learning industry is exhibiting, today, more secular growth trends as students of all ages see the long-term benefits and cost-effectiveness of remote learning solutions.

Currently estimated at around $330B, the Global e-Learning market is characterized by fast growth and is expected to exceed $680B by 2030 (implying a CAGR of 9.5%). In this context, the U.S. e-Learning market is currently estimated at $100B and expected to grow at near-double-digit annualized growth rates as well. Other major countries that are expected to see fast growth in their respective e-learning markets include China, Germany and Canada. - ReportLinker

Growth and Improving Profitability

Growing enrollment on the company's platform has been able to fuel both revenue growth and profitability. Total enrollment has increased from 112 thousand to 190 thousand in 2022, increasing at a CAGR of 11%.

Over the last five years, Stride has taken steady steps toward growth and profitability, despite showing stagnation for a few years prior. Since 2018, revenue has grown from $918M to $1.69B, increasing at a 5-year annualized 15.12% rate. Growth has been even faster for gross profits (increased from $315M in 2018 to $590M in 2022) and net income (increased from $28M to $107M) over the same period.

While still at the low end of the Technology companies spectrum, Stride's profitability metrics appear to be gradually improving over time. Gross margins have reached the 35% level, while net income is pushing past the 6% mark, looking to reach double-digit figures over the past few years.

Despite the company only recently making its way toward establishing consistent profitability, cash flow productivity has been rather consistent since 2018. Cash from operations has almost doubled over the past 5 years, reaching $207M in 2022, surpassing net income consistently. This indicates a healthy business model that is able to generate the cash flows necessary for debt obligation payments and future distribution to shareholders. Capital expenditures are also very low, given the asset-light nature of the business, only amounting to $10M in 2022. In terms of cash flow productivity, Stride seems to possess all the desirable attributes of a growth company that is establishing strong future returns for its shareholders.

Recent Results & Forward Expectations

On April 25, Stride reports its financial results for its third quarter of the fiscal year 2023. Widely beating on EPS by $0.21 ($1.30 reported) and revenue had the stock surging +10%. This also reflected hopeful expectations for the full 2023 fiscal year and beyond. Morgan Stanley subsequently raised its outlook for the stock.

For the full 2023, Stride issued an updated guidance expecting revenue around $1.82B and operating income around $200M. Going forward, management expects growth to persist. For the 2025 fiscal year, management looks to break the $2.0B mark and adjusted operating income to reach $300M.

A Strong Financial Position

By all accounts, Stride maintains a strong balance sheet position. The company has a large cash stockpile of cash & equivalents ($374M cash balance or approximately 25% of market cap). Total current assets are substantially higher than Stride's current liabilities (current ratio of approximately 3x), indicating strong liquidity. Leverage remains relatively low as the company maintains a long-term debt balance of $412M and a net debt balance of less than $50M. Total long-term liabilities amount to $800M and include, in addition to debt, operating and financial leases, deferred tax items and others.

Valuation

Despite its relatively strong growth attributes, S tride trades at attractive valuation multiples in my view. A 12.9x forward Non-GAAP P/E (and 13.7x GAAP) is well below sector and market averages, with the same being true for both the 5.9x EV/EBITDA and 0.9x P/S ratios.

Stride's valuation becomes even more attractive when considering the business' cash flow production strength compared to net income generation. LRN trades at an inexpensive 10.9x forward P/Cash flow multiple. The company's TTM P/E and P/CF ratios are also in the lower range of their respective 5-year averages, as shown in the chart below.

Final Thoughts

After all things are considered, Stride possesses solid growth attributes while maintaining a healthy financial position as well. While the online learning business is still taking form and competitive forces are expected to intensify rapidly over the next few years, LRN's current valuation implies an attractive risk/return outlook for the stock over the mid-term.

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