Career Learning Demand And Technology Investments Will Support A Stronger Long Term Outlook

Catalysts

About Stride

Stride provides online and tech enabled education programs that offer families an alternative to traditional schools.

What are the underlying business or industry changes driving this perspective?

• Sustained appetite for online education, reflected in total enrollment of 247,700 students and application volumes that management describes as healthy, can support future top line growth as Stride works through temporary platform issues and returns focus to volume driven revenue expansion.
• Strong interest in Career Learning, with revenue of US$241.5 million and enrollments of 110,000 on 20% growth, positions Stride to benefit if more families seek career oriented pathways, which could support mix driven revenue growth and help underpin operating margins.
• Growing demand for alternative education options tied to safety, health and special needs concerns that traditional schools may not address well provides a wide and durable pool of prospective families, which can support sustained enrollment levels and contribute to earnings resilience.
• Investment in industry leading third party learning and technology platforms, despite short term disruption, is aimed at improving scalability and student experience, which can help support better retention, lower support costs per student and, over time, support operating margin performance.
• Management’s focus on program quality, including free ELA tutoring for younger students, is intended to improve academic outcomes and satisfaction, which can support word of mouth demand, reduce withdrawal rates and help protect both revenue and net margins.

Assumptions

This narrative explores a more optimistic perspective on Stride compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Stride's revenue will grow by 4.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 12.8% today to 16.4% in 3 years time.
• The bullish analysts expect earnings to reach $463.1 million (and earnings per share of $8.78) by about January 2029, up from $315.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 15.0x on those 2029 earnings, up from 9.4x today. This future PE is lower than the current PE for the US Consumer Services industry at 17.4x.
• The bullish analysts expect the number of shares outstanding to grow by 1.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.43%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Prolonged platform and technology issues that keep affecting both the classroom experience and back office processes could sustain higher withdrawal rates, lower conversion of applications into enrollments and add remediation costs, which would pressure revenue and operating margins.
• A more cautious approach to in year enrollment growth, including limits on new student intake while systems are being fixed, could lead to periods where withdrawals exceed new enrollments. This would cap top line growth and reduce earnings leverage from a relatively fixed cost base.
• If competitors continue to scale their own online offerings and attract a portion of families seeking alternative education, Stride may face tougher competition for new students. This could weigh on future enrollment growth, revenue per enrollment and long term earnings power.
• Sustained investment in technology upgrades, tutoring and program quality, combined with higher stock based compensation and elevated capital expenditure, may keep gross margin and free cash flow under pressure. This could limit the improvement in net margins even if revenue grows.
• Revenue per enrollment guidance that is flattish year on year, alongside sensitivity to state mix, funding timing and where withdrawals occur, suggests that adverse mix shifts or less favorable funding adjustments in future years could hold back revenue growth and constrain earnings expansion.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Stride is $125.0, which represents up to two standard deviations above the consensus price target of $105.0. This valuation is based on what can be assumed as the expectations of Stride's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $125.0, and the most bearish reporting a price target of just $75.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $2.8 billion, earnings will come to $463.1 million, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $68.34, the analyst price target of $125.0 is 45.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.