LRN - Stride: Diversified Education Portfolio Strengthens Fiscal Q2 2023 Results

Summary

• Stride, Inc. delivered strong fiscal Q2 2023 results, beating EPS expectations by $0.12 to reach $1.19 per share and reporting revenue of $458.4 million, $15.17 million higher than forecasted.
• Investing in a diversified business portfolio gives Stride the competitive edge, as a newer, faster-growing career learning business compensates for a weaker-performing legacy general education segment. Growth is expected from general education due to a favorable macro climate, which sees half of all parents consider changing their child's school in the last year.
• Stride, Inc. has an asset-light business model, strong cash position, and four consecutive years of upward-trending top and bottom line performance.
• We are cautious about the cyclical nature of the business, the decrease in YoY legacy sales, and enrollment numbers.

Stride, Inc. ( LRN ) is a small-cap stock with a market cap of $1.72 billion but big plans to keep growing. While its origins lie in homeschooling for children, in 2020, the company made a strategic move into broadening its learning portfolio into lifelong learning opportunities through key acquisitions in technology and medical training. Career-focused learning for teenagers and adults has been delivering double-digit growth numbers, with many untapped opportunities to continue on its growth path. Long-term investors have been rewarded with returns of 134.55% over the last five years, although LRN stock has been very volatile.

Homeschooling growth saw an exaggerated boom during COVID-19 and has since returned to a normalized growth rate if we look at the historical data. Stride, Inc. is tapping into a growth market by providing career learning solutions. It has recently raised its revenue forecast for the fiscal year 2023. For this reason, there is still a lot of upside potential for this asset-light business model, and we recommend that investors take a bullish stance on Stride, Inc. stock.

Overview

Stride, Inc. provides an alternative full-time core education for children, high school students, and adults through virtual and blended learning services. In December 2020, the company changed its name from K12 to Stride, broadening its learning solutions to students of all ages. The business has grown through acquisitions to enter new markets and organically. Stride, Inc. predicts a $100 billion addressable market in the U.S. and provides scalable solutions to tap into this massive opportunity.

The company's revenue comprises two business segments: its legacy General Education business, which is aimed at younger K 12 students, and its newer Career Learning business which is aimed at teenagers and adults. The business models include school-as-a-service and sales of learning software solutions and services.

If we look at the revenue and enrolments posted in Q2 2023, we can see significant YoY growth in career learning and an increase in the number of students. General education has decreased YoY. However, we should consider that FY2021 was exceptional due to the COVID-19 pandemic, and enrollments have been increasing from the prior quarter.

There are several reasons Stride, Inc. is in a solid position to continue growing. Due to various reasons, such as philosophical, safety, religious, and medical, parents are taking a more active role in their children's education. This has benefited alternative education offerings if we look at the increase in the growth of homeschooling in the U.S.

Stride, Inc. has been in the industry for over twenty years. They have an increasing number of returning students, referral businesses, and sticky customers who tend to stay for long periods by onboarding more of their children due to the increased learning solutions provided. Stride, Inc. is investing in new offerings across diverse markets and verticals, such as updated career platforms, teacher development platforms, and a wider variety of district tutoring platforms which can all lead to a growing number of users.

Financial overview and valuation

Stride, Inc. released a robust set of fiscal Q2 2023 financial results last week, which immediately affected the stock price with an increase of 13%. We should be aware that its Q1 2023 was a significant disappointment, and the stock fell by over 25%. This was an exaggerated response. If we look across the last four annual financial reports, the business has been consecutively improving its top and bottom line. One of the critical success factors has been its growing teenage and adult learning businesses, which eased the loss in sales from its legacy general education business.

If we look at fiscal Q2 2023 , we can see that revenue increased 12% YoY to $485.4 million, the gross profit margin was stable at 11%, and net income increased by 21% to $50.7 million for the quarter. Earnings per share at $1.20 increased YoY from $1.01 in Q2 2022. Enrollment has decreased YoY by 10% to 177,500, although career learning increased by 24.4%. General education enrollment dropped by 34.4% YoY. However, registration is growing again from quarter to quarter as more parents search for alternative schooling options.

If we look at the company's balance sheet , we can see that it has a total debt of $564.67 million and total cash of $401.18 million. Considering the liquidity ratios, we can see very healthy liquidity with a current ratio of 3.73 and a quick ratio of 3.38. Therefore, there are more than sufficient liquid assets if it were to have to pay its short-term liabilities. LRN is also investing in software development, property and equipment, as well as developing its curriculum, which was a CapEx of $16.9 million for the quarter.

LRN reported TTM $239.73 million in cash from operations. We can see that in the last quarter, there was a positive free cash flow of $149.8 million, which the company can use to invest in to the business, pay off expenses and reward investors. The company also expects to deliver positive cash flow for the rest of the fiscal year.

If we compare LRN to two of its peers in the market, Chegg, Inc. ( CHGG ) and 2U, Inc. ( TWOU ), we can see that LRN has a forward price-to-earnings ratio of 15.99, which is higher than CHGG. However, if we consider growth, LRN's YoY growth was 10.07% while CHGG had negative growth of 0.69% and TWOU had a YoY growth of 5.81%.

Final thoughts

Stride, Inc. is a longstanding education brand that has built up customer loyalty and grown through referrals and returning students or family members of students. It provides a valuable alternative education for children, teenagers and adults. Its newer career learning business is growing quickly with consistent double-digit growth. We expect this to continue as it invests in developing more offerings across markets and vertically.

Stride, Inc. has increased its revenue predictions for FY 2023 based on the speed of growth and increased parent interest in alternative education solutions. Furthermore, although homeschooling has yet to reach the highs of the COVID-19 pandemic, we can see long-term and steady growth within the industry since the 1970s. For this reason, there is a lot more upside potential for Stride, Inc., and I recommend a bullish stance on this business model, fulfilling an essential market need.

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