Platform Migration Risks May Reshape Online Career Learning Demand Yet Supportive Tailwinds Should Eventually Emerge

Catalysts

About Stride

Stride provides tech enabled, online and career focused education programs for K-12 students and adult learners.

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

• Although families are increasingly seeking safe, flexible alternatives to traditional schools that support double digit enrollment growth, persistent execution risk around major platform migrations could prolong elevated withdrawal rates and dampen top line expansion and earnings growth.
• While demand for career focused online pathways is accelerating and Career Learning enrollments are growing over 20 percent, scaling these programs requires continuous curriculum and employer partnership investment that may pressure operating margins and delay incremental profitability.
• Although a broadly supportive public funding backdrop underpins stable revenue per enrollment, shifts in state level enrollment mix and policy timing could cap upside and introduce volatility in revenue growth and free cash flow conversion.
• While Stride’s larger scale and brand recognition position it to capture a growing share of online learners, intensifying competition from well capitalized rivals may force higher marketing and product investment that constrains net margin expansion.
• Although upgrading to industry leading third party platforms should eventually enhance student engagement and retention, ongoing integration complexity and vendor dependencies raise the risk that remediation drags into future school years, limiting enrollment growth and margin improvement beyond the current fiscal year.

Assumptions

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

• The bearish analysts are assuming Stride's revenue will grow by 3.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 12.8% today to 16.6% in 3 years time.
• The bearish analysts expect earnings to reach $459.9 million (and earnings per share of $8.74) by about December 2028, 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 bearish analyst cohort, the company would need to trade at a PE ratio of 9.1x on those 2028 earnings, up from 8.7x today. This future PE is lower than the current PE for the US Consumer Services industry at 16.5x.
• The bearish 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 7.5%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Extended disruption from the dual front office and back office platform migrations could keep withdrawal rates elevated and limit in-year enrollment growth beyond fiscal 2026, restraining top line expansion and slowing earnings growth over the medium term. This would challenge a rising share price that assumes a quick operational recovery and smoother scale up in online demand.
• If Stride is forced to keep capping in-year enrollment to protect program quality while it stabilizes its technology stack, it may fail to fully monetize strong secular demand for online and career focused education. This could cause revenue growth to decelerate from recent double digit levels and undermine expectations for sustained operating leverage and margin expansion that support a higher valuation.
• Ongoing investment needs in third party platforms, free tutoring and other student support initiatives aimed at defending long term retention could exceed management’s current plans. This could keep gross margins below fiscal 2025 levels and compress net margins even as enrollment grows, which would put pressure on earnings and limit the upside to the share price from current profitability baselines.
• Rising competitive intensity as large rivals replicate Stride’s online and career learning models in a growing virtual education market could force higher marketing and product spend to protect share. This could erode operating margin gains and weaken earnings power, especially if state funding and revenue per enrollment remain only flattish despite the favorable long term shift toward alternative schooling.

Valuation

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

• The assumed bearish price target for Stride is $75.0, which represents up to two standard deviations below the consensus price target of $113.75. 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 more bearish end of the spectrum.
  
• 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 $75.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $459.9 million, and it would be trading on a PE ratio of 9.1x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $63.41, the analyst price target of $75.0 is 15.5% 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.