Educational Innovations And Calculated Investments Poised To Elevate Revenue And Market Share

Key Takeaways

• Stride's diversification and technological investments hint at efficiencies and new revenue streams, enhancing market penetration.
  
• Strong financials and a solid cash position enable strategic growth moves, potentially boosting market share and revenue.
  
• Stride's financial challenges include reliance on fluctuating funding and soft IT offering revenues, potentially diluting earnings and hindering profitability.

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.

• High parent dissatisfaction and significant interest in alternative education pathways indicate a growing market for Stride's education models, which could lead to increased enrollments and revenue growth.
  
• Record revenue, profitability, and free cash flow achievements demonstrate the company's effective operational efficiency and scaling, potentially impacting future earnings and margins positively.
  
• Stride's significant investments in technology and automation could lead to further operational efficiencies, reducing SG&A expenses relative to revenue and improving net margins over time.
  
• The diversification and expansion of product offerings, such as tutoring solutions gaining formal acceptance in several states, suggest potential for new revenue streams and market penetration that could drive up overall revenue.
  
• A strong cash and securities position provides Stride the flexibility for strategic investments or acquisitions that could enhance its product offerings or market reach, potentially accelerating revenue growth and market share expansion.

Assumptions

• Analysts are assuming Stride's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.0% today to 12.2% in 3 years time.
• Analysts expect earnings to reach $317.5 million (and earnings per share of $6.9) by about September 2027, up from $204.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.0x on those 2027 earnings, down from 16.6x today. This future PE is lower than the current PE for the US Consumer Services industry at 20.6x.
• Analysts expect the number of shares outstanding to grow by 0.88% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.31%, as per the Simply Wall St company report.

Risks

• Stride's reliance on state funding and the potential loss of federal ESSER funding could create a headwind in revenue per enrollment growth, impacting overall revenue growth.
  
• The softness in IT offerings within Adult Learning resulting in a 16% revenue decline could negatively affect segment profitability and overall net margins.
  
• The increase in stock-based compensation by $11.2 million from the previous year, if it continues to rise, could dilute earnings and negatively impact net income.
  
• The early stage of enrollment for the fall season presents uncertainty, and any potential failure to grow enrollments as anticipated could adversely affect revenue forecasts.
  
• The projection of flat revenue per enrollment for FY 2025, coupled with competitive and funding uncertainties, could limit revenue growth potential and impact profitability.

Valuation

• The analysts have a consensus price target of $86.0 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 $317.5 million, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 6.3%.
• Given the current share price of $79.49, the analyst's price target of $86.0 is 7.6% 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.