Expansion Into K-12 Tutoring And B2B Will Boost Future Prospects

Key Takeaways

• Record enrollments and increased Career Learning demand drive revenue growth, bolstering Stride's financial performance.
  
• Strategic initiatives in K-12 tutoring, AI innovation, and B2B focus aim to enhance margins and future earnings.
  
• Strategic shifts and enrollment pressures could affect revenue and earnings, with federal funding changes and enrollment caps posing additional risks.

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 has posted record enrollments for three consecutive years, demonstrating ongoing strong demand for their educational offerings, which is likely to drive revenue growth.
  
• The company is focusing on new market opportunities and initiatives to improve their core business and tap into structural demand post-pandemic, potentially enhancing future earnings and margins.
  
• Enrollment growth in Career Learning programs is up 31%, indicating a favorable trend that contributes significantly to revenue growth.
  
• The rollout of nationwide K-12 tutoring and new innovations like AI features are strategically important and could support future revenue streams without immediate financial impact.
  
• Improvements in gross margins and a focused shift in the Adult Learning business toward B2B, which typically offers more stable contracts and higher margins, could positively impact net margins and profitability.

Stride Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Stride's revenue will grow by 9.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.4% today to 14.4% in 3 years time.
• Analysts expect earnings to reach $396.4 million (and earnings per share of $8.59) by about January 2028, up from $240.2 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 17.2x on those 2028 earnings, down from 21.5x today. This future PE is lower than the current PE for the US Consumer Services industry at 20.7x.
• Analysts expect the number of shares outstanding to grow by 2.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.51%, as per the Simply Wall St company report.

Stride Future Earnings Per Share Growth

Risks

• The company's Adult Learning business continues to experience softness, with revenues declining by $6.1 million compared to the previous year. This ongoing decline could negatively impact overall revenue and net margins.
  
• Despite growth in enrollment, the actual revenue per enrollment is expected to decrease by 1% to 2% due to state mix impacts, suggesting pressure on revenue and possibly affecting future earnings.
  
• The strategic shift in the MedCerts business from B2C to B2B, while seen as potentially beneficial long-term, may involve periods of revenue decline during the transition, impacting net margins and earnings until stabilization.
  
• Revenue from certain federal funding streams comprises less than 5% of overall revenue but still poses some risk if federal funding policies change and affect indirect revenues from the states.
  
• Enrollment caps, whether state-imposed or partner-imposed, can limit growth in student numbers, potentially restricting revenue and affecting the company's ability to scale earnings in high-demand situations.

Valuation

• The analysts have a consensus price target of $122.75 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 $130.0, and the most bearish reporting a price target of just $109.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $396.4 million, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of $120.64, the analyst's price target of $122.75 is 1.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.