Virtual Learning Surge Boosts Growth As Career Programs Expand Revenue And Margins

Key Takeaways

• Stride's strong enrollment growth and focus on Career Learning programs are driving future revenue and profit margin enhancements.
  
• Operational efficiency and potential state expansion create a stable revenue environment and new growth opportunities.
  
• Potential revenue challenges due to declining funding and flat earnings, coupled with cash flow issues, threaten Stride's growth and financial stability.

Catalysts

A technology-based education service company, engages in the provision of proprietary and third-party online curriculum, software systems, and educational services in the United States and internationally.

• Stride is experiencing accelerated enrollment growth, with an 18.5% year-over-year increase, indicating strong demand for its virtual learning programs. This demand is likely to drive future revenue growth as enrollment numbers continue to rise.
  
• The company is focusing on scaling up its Career Learning programs, which saw a revenue increase of over 30% from the previous year. As these programs contribute a significant portion of growth, they are expected to positively impact both revenue and profit margins.
  
• Stride has demonstrated operational leverage by maintaining flat SG&A expenses while increasing revenue, suggesting efficiency in scaling operations. This should lead to improved net margins as the company continues to grow.
  
• Despite losing ESSER funding, state funding increases and a favorable mix are expected to offset this headwind. This positive funding environment should help stabilize revenue per enrollment, influencing future earnings.
  
• The potential to expand into additional states and enhance its educational offerings presents a growth catalyst, potentially increasing the company’s market reach and overall revenue prospects.

Stride Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Stride's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.0% today to 12.1% in 3 years time.
• Analysts expect earnings to reach $314.1 million (and earnings per share of $6.83) by about October 2027, up from $204.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.9x on those 2027 earnings, up from 13.4x today. This future PE is lower than the current PE for the US Consumer Services industry at 20.5x.
• Analysts expect the number of shares outstanding to grow by 2.63% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.43%, as per the Simply Wall St company report.

Stride Future Earnings Per Share Growth

Risks

• The loss of ESSER funding is expected to act as a headwind to revenue per enrollment this year, which could result in a decline or stagnation in revenue per enrollment. This will impact overall revenue growth.
  
• Adult Learning revenue was negatively impacted by a slowdown in software development products, with expectations for flat revenue in upcoming quarters, affecting total revenue and potentially net margins.
  
• Flat SG&A year-over-year suggests that even with growing demand, there may be constraints on marketing and enrollment investment, which could limit future organic growth and revenue potential.
  
• Seasonal and negative free cash flow in the first quarter may indicate cash flow management challenges, affecting overall liquidity and financial stability in future quarters.
  
• The uncertainty around political outcomes and potential impacts on school choice policies could pose risks to funding and the regulatory environment, impacting revenue stability and growth projections.

Valuation

• The analysts have a consensus price target of $86.4 for Stride based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $94.0, and the most bearish reporting a price target of just $74.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.6 billion, earnings will come to $314.1 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $64.49, the analyst's price target of $86.4 is 25.4% 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.