Stride: EdTech company with 25.5% upside potential

Reason 1. Growing EdTech market and US education challenges

Stride Inc. (LRN) is an education services company providing virtual and blended learning. Since 2006, it has established itself as a pioneer in online education, maintaining steady, double-digit growth. With a focus on a wide range of clients, encompassing primarily public and private schools, school districts, and charter boards, the company provides a complete package tailored for both school students and adults, leveraging an innovative school-as-a-service model. Stride’s products and services include curriculum, systems, instruction, and support services, enabling its clients to attract, enroll, educate, track progress, and support students.

The company’s solutions address two growing markets:

• General Education. Products and services for the General Education market are predominantly focused on core subjects, including math, English, science and history, for kindergarten through 12th grade students to help build a common foundation of knowledge. These programs provide an alternative to traditional “brick-and-mortar” school options and address a range of student needs including, safety concerns, increased academic support, scheduling flexibility, physical/health restrictions or advanced learning.
• Career Learning. Career Learning products and services are focused on developing skills to enter and succeed in careers in high-growth, in-demand industries, including information technology, healthcare and general business. Through Career Learning programs, Stride offers middle and high school students content pathways that include job-ready skills and work experiences and, for high school students, that can lead toward an industry certification and/or college credits.

The expansion of the online education, or EdTech, market, boosted by the COVID-19 pandemic, still presents compelling opportunities. According to Statista, the global EdTech market is expected to reach a revenue of $185.2 billion in 2024, up by 11.2% versus 2023. In 2024–2028, it is forecast to maintain a steady compound annual growth rate (CAGR) of 8.61%, ultimately reaching a volume of $257.7 billion by the end of the forecast period.

In addition, the online university education segment is anticipated to emerge as the largest segment, with a projected market volume of $120.7 billion in 2024. Within the global landscape, the US may lead in revenue generation, reaching $87.5 billion by 2024. Moreover, the average revenue per user (ARPU) in the global online education market is projected to stand at $21,000 in 2024, underscoring the market's significant potential and growth prospects on a global scale.

Global online education market size; source: Statista

Within the global EdTech market, the K-12 segment is anticipated to dominate the market share of 40% in 2023. K-12 education technology focuses on primary and secondary education, encompassing students from kindergarten to the 12th grade. This dominance can be attributed to the increasing adoption of digital tools and interactive learning platforms in schools. For example, interactive e-learning modules, gamified educational apps, and virtual classrooms not only engage students effectively but also provide teachers with innovative tools to facilitate better understanding. Additionally, personalized learning platforms in the K-12 sector are designed to address individual student needs, fostering a more tailored and effective educational experience. The integration of the augmented reality (AR) and virtual reality (VR) technologies further enhances the immersive learning environment for students.

The US presents a massive market opportunity within the education sector. The US market for K-12 education is large, and virtual and blended learning has gained broader awareness and acceptance following the COVID-19 pandemic. For example:

• According to a National Education Policy Center (NEPC) report, published in May 2023, 1,093 full-time virtual schools enrolled 566,344 students, and 332 blended schools enrolled 106,219 students in 2021–2022.
• Another survey by the National School Choice Awareness Foundation, dated January 2023, found that 53.7% of parents had considered, searched for, or chosen a new or different school for their school-aged child within the past year. Of those who were considering switching, 20.8% of parents visited, inquired about, or researched full-time online school.
• The National Home Education Research Institute estimated that there were approximately 3.1 million home-educated students in the US during the school year 2021–2022. Prior to the COVID-19 pandemic, the number of students was 2.5 million, and estimates showed home-educated student enrollments growing by 2% per year since 2016.
• The September 2022 data from the Bureau of Labor Statistics estimated that demand for occupations that require non-degree post-secondary education would grow 6.7% by 2031, a faster rate than overall employment.

Growth of homeschooling in the US; source: The National Home Education Research Institute

These trends are coupled with deteriorating quality of public education in the U.S. While education spending in the US is higher than the OECD average, with total education spending surpassing one trillion dollars and expenditure on K-12 schools approaching nearly $700 billion annually, there are concerning indicators. Nearly half of all US public-school students are lagging in educational benchmarks, reflecting historical levels of dissatisfaction with public education. This dissatisfaction is coupled with parental concern about learning and academic progress.

Moreover, the Nation’s Report Card projected that if future National Assessment of Educational Progress score patterns reflect historical trends, it would take decades to return to 2019 levels following the learning loss suffered during the COVID-19 pandemic. These challenges underscore the urgency for innovative solutions and investments in education to address pressing issues and ensure the success of future generations.

Expenditures on education in the US; source: Stride Investor Day 2023

Thus, the complex education landscape in the US, characterized by substantial investment, persistent challenges, and evolving needs, presents significant opportunities for EdTech companies. As the demand for innovative solutions to enhance learning outcomes and address the shortcomings in traditional educational systems continues to grow, Stride is well-positioned to offer transformative services that meet the needs of students, educators, and parents alike.

Reason 2. Resilient business model aimed at achieving long-term targets

Stride's business strategy encompasses several key elements aimed at enhancing its offerings, expanding its reach, and improving its services:

• Comprehensive offerings. The majority of revenue is derived from comprehensive school-as-a-service offering which includes an integrated package of curriculum, technology systems, instruction, and support services. The average duration of the agreements for school-as-a-service offering is greater than five years, and most provide for automatic renewals absent a customer notification of non-renewal.
• Geographical expansion. Currently, Stride offers over 90 general education programs in 31 states and DC, along with more than 55 career learning programs available in 27 states and DC. To further enhance its reach, the company is planning to leverage multiple models, aiming to expand capacity within existing states and venture into new territories. Among the new states slated for inclusion are Maryland, Massachusetts, Nebraska, Connecticut, and New Hampshire. Additionally, Stride is set to introduce or expand programs in states such as California, Georgia, Nevada, Kentucky, Florida, Louisiana, and North Carolina.

Stride’s K-12 full-time programs in the US; source: Stride Investor Day 2023

• Improvement of student retention. Stride has partnerships with the school boards to make a concerted effort to enroll and retain students who are truly engaged and ready to learn. Once students are enrolled, it offers programs to provide early intervention and focused engagement and retention strategies, which strive to help students stay on track, improve engagement and, ultimately, give students a better chance at academic success.
• Expansion of the career training market. The management plans to expand the Stride Career Prep brand and pursue industry partnerships by offering career readiness training beyond the traditional K-12 market and into adult education and corporate training.
• Introduction of new products. While Stride currently operates within a limited scope of educational verticals, it possesses significant expansion opportunities in areas not yet covered by its programs. These verticals encompass Experiencing Learning (robotics, coding, voice and chat technologies), Learning Support (tutoring, study notes, after-school programs), and Workforce & Talent (performance development, talent acquisition, workforce training).

Stride’s expansion opportunities within educational verticals; source: Stride Investor Day 2023

• Strategic partnerships and acquisitions. Stride plans to achieve its goals not only organically but also pursuing selective acquisitions that complement its existing educational offerings and business capabilities. For example, in 2020, the company entered the adult learning market acquiring industry leaders such as Galvanize, Tech Elevator, and MedCerts.

As a result of these endeavors, Stride manages to demonstrate operational and financial excellence. In Q2 FY2024, the company surpassed analysts' expectations due to robust enrollments and revenue per enrollment and achieved several milestones. First, the company finished the quarter with enrollments exceeding pandemic highs, with an average of 193,000 enrollments, marking a 8.9% increase year-over-year (YoY). Both general education and career learning enrollments saw significant YoY growth of 8.5% and 9.2%, respectively.

Secondly, Stride achieved a record-breaking quarterly revenue of $504.9 million (+10.1% YoY). Adjusted operating income soared to $94.9 million (+24.4% YoY), while adjusted EBITDA reached $118.3 million (+17.8% YoY). Building on this strong performance, the management has raised its full-year FY2024 revenue and profitability guidance, with the mid-point of revenue guidance now exceeding $2.0 billion.

Stride’s long-term financial targets; source: Stride Investor Day 2023

In its FY2028 guidance, Stride set ambitious long-term targets. Thus, the company aims for a revenue in the range of $2.7–$3.3 billion, with a projected CAGR of 10% to the mid-point of the forecast. Additionally, it targets an adjusted operating income in the range of $415–$585 million, with a 20% CAGR to the mid-point of the forecast. Finally, an EPS is expected to fall within the range of $6.15–$8.35, also with a 20% CAGR to the mid-point of the forecast. The targets demonstrate Stride's commitment to sustained growth and financial performance over the long term, reflecting its ability to leverage its product offerings, expertise and infrastructure.

Financial performance

Stride operates on a fiscal calendar that results in a 52-week fiscal year ending in June. Fiscal 2023 was a 52-week period ended on June 30, 2023. As of December 31, 2023, Stride’s trailing twelve months’ (TTM) financial results can be summarized as follows:

• Revenue increased to $1,939 million, up by 5.5% compared to FY2023.
• Gross profit grew by 11.5%, from $647.1 million in FY2023 to $721.4 million TTM, with gross margin improving from 35.2% to 37.2%.
• Operating income soared by 29.2% to $213.3 million. Operating margin expanded from 9.0% to 11.0%.
• Net income surged by 34.4%, from $126.9 million in FY2023 to $170.6 million TTM. Net margin increased from 6.9% to 8.8%.

Dynamics of annual financial results; source: compiled by author

Stride has demonstrated positive and stable dynamics of cash flows over the past several years. Its TTM operating cash flow (FFO) amounted to $220.0 million, up by 8.3% and 173.6% compared to FY2023 and FY2020, respectively. Free cash flow (FCF) reached $158.4 million, up by 17.1% and 347.1% compared to FY2023 and FY2020, respectively.

Dynamics of annual financial results; source: compiled by author

Stride maintains a robust balance sheet. As of December 31, 2023, its total debt was $477.6 million, up by 1.6% compared to the end of FY2023. Given reported cash and cash equivalents of $354.4 million, this results in net debt of $123.2 million. The company earned $324.5 million of TTM EBITDA, and, consequently, the Net Debt to EBITDA ratio equals 0.38x, so the debt burden is insignificant. Moreover, with TTM interest expenses of just $8.4 million and TTM EBIT of $213.3 million, Stride’s interest coverage ratio stands at 25.49x.

Stock valuation

Stride trades with a discount to the average multiples of its peers: EV/Sales — 1.32x, EV/EBITDA — 7.72x, P/FFO — 11.35x, P/E — 14.51x. However, the company operates in a promising market, has an ambitious strategy aimed at business expansion and increasing profitability while most of its competitors suffer losses. Thus, it offers a better return per unit of risk taken.

Comparable valuation; source: compiled by author

The minimum price target set by Morgan Stanley is $65.0 per share, while Citigroup values Stride at $75.0 per share. According to the Wall Street consensus, the stock’s fair market value stands at $75.0, implying a 25.5% upside potential.

Price targets of investment banks; source: compiled by author

Key risks

• The majority of Stride’s revenues come from comprehensive school-as-a-service offering and depends on per-pupil funding amounts and payment formulas remaining near the levels existing at the time the company executed service agreements with schools.
• The schools that Stride serves are governed by independent governing bodies that may shift their priorities or change objectives in ways that are adverse to the company and to the students who attend the school programs it administers, or they may react negatively to acquisitions or other transactions.
• Compliance with curriculum standards and assessments for individual state determinations under the The Every Student Succeeds Act (ESSA) may create ongoing challenges to ensure that Stride’s curriculum products align with state requirements, which could possibly cause academic performance to decline and dissatisfaction by school customers which could limit growth and profitability.
• If market demand for online options in public schooling does not increase or if additional states do not authorize or adequately fund virtual or blended public schools, Stride’s business, financial condition and results of operations could be adversely affected.
• Increasing competition in the education industry sectors that the company serves could lead to pricing pressures, reduced operating margins, loss of market share, departure of key employees and increased capital expenditures.

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