Stride, Inc. (NYSE:NYSE: LRN) is an online education company and leading provider of technology-based learning solutions for K-12 elementary classrooms in the United States. This segment has been transformed during the pandemic where virtual learning has become the only option for many schools around the world. Stride has been able to capture the surge in demand while expanding into adult learning and job training opportunities that have contributed to growth.
We covered the stock with a bullish story last year highlighting impressive operational and financial trends. In our opinion, the setup has evolved even better than expected, as Stride’s latest quarterly report confirms that the online education boom is here to stay. LRN shares have already been a big winner, up 20% in 2022, and we expect even more upside as the company continues to consolidate market share with a positive long-term outlook. Today’s update recaps recent developments and adds to our perspective on the direction LRN will be heading.
LRN key measures
Stride reported its fiscal fourth quarter results on Aug. 9 with GAAP EPS of $0.66, beating consensus by $0.04. Revenue of $455 million, up 15% year over year, was also above estimates. Keep in mind that 2021 has been an explosive year for the company, where revenue grew nearly 50% and profits more than doubled. By this measure, this quarter’s results demonstrated the strength of the underlying organic tailwinds. For the full year, revenue of $1.7 billion was up 10% from 2021, while adjusted operating income of $188 million was up 17%.
Operationally, the story has been the growth of career learning, with revenue up 61% year-on-year, now accounting for 24% of total business. Even though enrollment in the K-12 general education segment has faced some volatility, down 8.6% year-on-year from tough competition, the number of students on the platform is still up more than 33% from pre-pandemic levels. A series of strategic acquisitions over the past few years, including specialized professional training platforms like “MedCerts”, for healthcare certifications, and “TechElevator” as a coding bootcamp, have supported enrollment trends .
Another big theme was a growing “funding per student” metric that hit $8,100, up about 4% from pre-pandemic levels, reflecting the higher implied revenue per user. Recognizing that price increases are often limited by state or local public school budget caps, the trend suggests that Stride has been able to push some of its pricing power.
On the cost side, SG&A as a percentage of revenue fell 150 basis points in 2022 to 26.1% from 27.6% last year. This effort helped increase profitability last year. That being said, management has released guidance suggesting a slight increase in general and administrative expenses for 2023 based on ongoing inflationary impacts, particularly with respect to the education labor market. The company is moving forward with salary increases to stay competitive and support the company’s continued growth.
While they didn’t directly offer financial targets for fiscal 2023, reading the comments from the conference call pointed to some near-term earnings pressure. That being said, the company’s outlook for fiscal 2025 remains more positive. Stride expects annual revenue of approximately $2.0 billion over the next three years, representing mid-single-digit growth per year over the period. Management also sees operating profit increasing, up more than 60% at the estimated midpoint to the 2022 result, with an upside as the business benefits from its larger scale and thanks to the stimulus value-added, higher-margin career learning programs.
Finally, note that the balance sheet position is a strong point of the company’s investment profile. Stride ended the quarter with $389 million in cash and cash equivalents versus $478 million in total debt. For reference, the company generated about $200 million in free cash flow last year. Stride does not currently pay a dividend, but said it intends to review options for returning cash to shareholders over the long term.
Is LRN a good long-term investment?
We like Stride with its direct exposure to the K-12 category of online learning while being bullish on the adult program initiatives. When district-level elementary schools integrate Stride, the engagement typically represents a multi-year relationship as solutions are customized to fit the specific curriculum as well as training and onboarding costs. In this regard, the company ends up being very resilient with relatively low churn.
On the career readiness side, management is keen to highlight how specialized adult training helps bridge the gap in the perception that typical college and university graduates lack job-ready skills. It is believed that as traditional higher education career paths lose relevance, more students will turn to career learning programs like Stride’s options for real placement opportunities. On this point, Stride is making progress by partnering with large companies for employee “upskilling” and retention programs.
The other dynamic to consider is that Stride currently only operates in 30 states for the general education segment and 24 for professional learning. Both segments are expected to expand to 36 states by 2025 as part of the growth story. Management sees a +$100 billion addressable market in the US highlighting its lead.
Taking a step back from the broader online education and virtual learning industry, the market remains segmented with various players focusing on different markets. Stride, which was formerly known as “K12 Inc.”, is the leader on the primary education side, but other players are focusing on areas such as tutoring, exam preparation, technical certificates or university-level programs. By this measure, it’s hard to tell that a particular stock is a direct comparison to Stride.
Nonetheless, LRN stands out by trading at an EV of 6x to pass on an EBITDA multiple, which is a discount to the broader industry. Chegg, Inc. (CHGG), for example, which has made a name for itself on “homework help” tutoring and self-study guides, trades at a multiple of 14x on the same metric. 2U, Inc. (TWOU), which partners with colleges and universities, is also trading at a premium of 12 times its estimated forward EBITDA. Other names like Coursera, Inc. (COUR) and Nerdy, Inc. (NRDY) are currently not profitable.
We argue that Stride is the value choice in the segment benefiting from stronger fundamentals. K-12’s leadership provides strong cash flow while the growth of emerging career learning programs adds to its long-term potential. Stocks deserve a structurally higher premium based on strong company fundamentals.
LRN Stock Price Prediction
Shares of LRN have traded higher over the past year and have bucked the trend of broader market volatility this year with a positive return. We rate LRN as a buy with a price target for the year ahead at $50.00, representing an 8x EV multiple to advance EBITDA over the current year consensus. The attraction here is a stable growth prospect with the possibility of accelerating earnings as margins increase with business moving more and more towards career learning programs.
In terms of risks, a deterioration in the macroeconomic outlook relative to the current baseline scenario would likely put pressure on growth and open the door to further volatility. Weaker-than-expected growth or disappointing earnings could also lead to another sell-off. Tracking points over the next few quarters include enrollment level trends and EBITDA margin.