Stride Inc. (LRN, Financial), formerly known as K12 Inc., provides various online and blended learning solutions for students of all ages and backgrounds. The company operates as an education management organization that offers an online curriculum to homeschooled children and other schools, as well as career learning programs in fields such as health care, technology and business. Given the rapidly evolving educational landscape, the company holds the potential to grow aided by its innovative product portfolio.
Further, the company's recent financial performance suggests it is successfully navigating student enrollment challenges, which is a promising sign for long-term-oriented investors.
The rise of edtech
In the aftermath of the pandemic, the landscape of the education industry in the United States has changed dramatically, threatening to reshape the fundamentals of this sector. Enrollment in the majority of the nation's largest school districts remain below pre-pandemic levels today. The decline is particularly higher in kindergarten counts, reflecting not only diminishing birth rates, but also the burgeoning alternatives drawing parents away from traditional public schools.
These trends, combined with the looming possibility of an economic downturn and the depletion of federal relief funds, present a plethora of factors that experts fear might result in a challenging situation for the U.S. education system.
Impact of pandemic aid and enrollment crisis
The $190 billion in pandemic aid allocated to schools acted as a temporary buffer against the financial ramifications of declining enrollment, postponing the necessity for staff cuts and program reductions. However, the pending expiration of these funds poses a dilemma of unprecedented proportions for the industry.
Further, budget deficits compounded by escalating housing costs have driven families away from urban areas, intensifying the enrollment crisis. An enrollment analysis by The 74 reveals interesting details about the state of enrollment. Chicago, Houston and Clark County have witnessed declines of 2.5%, 2.4% and 2%, respectively, while New York and Los Angeles experienced drops of just under 2%, Hillsborough County district in Florida and Gwinnett County school district near Atlanta have defied the trend, surpassing pre-pandemic enrollment levels.
Student debt and the rise of edtech
The issue of mounting student debt casts a shadow over higher education as well. The cost of college has surged twofold over the past four decades, exacerbating the corresponding rise in student loan borrowing. As of the first quarter of 2023, the cumulative student loan debt in the U.S. stood at a staggering $1.77 trillion. With more than 92% of this debt being federal student loans, the impact on borrowers is profound.
The burden of student loans, amplified by stagnant wages, impedes borrowers from pursuing significant life milestones. Delinquencies and defaults on student loans further compound the issue, distancing themselves from accessibility to other forms of debt. Moreover, a significant proportion of student loan borrowers—40.4 million as of 2021 according to USA Today—leave education without completing a degree. This not only deprives them of the higher earning potential that comes with a degree, but also exacerbates the challenges of repaying loans.
During the pandemic, the education industry underwent a profound transformation that saw more than 90% of the world's schools and numerous colleges and universities pivot to online teaching. This shift marked a pivotal moment in the history of education, catalyzing the rise of educational technology, or edtech, as a major force in shaping the future of learning.
Beyond a mere response to a crisis, edtech has emerged as a fast-growing, disruptive technology contributing around 6% to the global gross domestic product, and its impact is set to reach unprecedented heights in the future. According to Market.us, the edtech sector will grow at a compounded annual rate of 13% from $129 billion in 2022 to $421 billion by 2032.
The bull case for Stride
Stride provides a comprehensive suite of online learning solutions, including virtual classrooms and learning platforms. This product portfolio and the company's extensive experience going back more than two decades are two factors that position it well to make the most of the rising demand for EdTech.
Use of AI and enrollment growth
Stride has embraced the power of generative artificail intelligence to enhance the educational experience offered to its students. By leveraging this technology, educators can dedicate more time to personalized interactions with students while minimizing administrative burdens. This not only enhances the learning process, but also opens avenues for increased efficiency.
While it remains in the initial stages of the enrollment season, Stride's recent earnings report underscores the positive impact of online learning, driven by in-year enrollment growth. Within its middle and high school division, revenue came to $586.8 million, driven by enrollments totaling 65,900 for the year. This represents a substantial 57% increase compared to the previous year. Further, revenue per enrollment increased 16.3% year over year $8,885.
Expansion into career learning
The evolving demands of the job market highlight the importance of real-world skills, and Stride is aggressively expanding to offer learning solutions to fill this market gap. According to a 2021 survey conducted by the company, 89% of employers are more likely to hire high school graduates with practical skills. Stride's K12-powered career learning programs help bridge the skill gap across industries.
This emphasis on skill acquisition resonates with broader trends. Technavio predicts the corporate e-learning market will expand at a CAGR of 13% through 2027. Stride is already bringing in substantial revenue from its career-focused business segment. For the most recent quarter, it reported Career Learning revenue of $706 million, including over $100 million from its adult learning business. In the next few years, the company is likely to benefit further from the expected growth of the corporate e-learning market.
Takeaway
The rise of edtech is fundamentally reshaping the educational landscape, with the pandemic acting as a driving force that accelerated the integration of technology into learning processes, and the momentum shows no signs of slowing down. Against this backdrop, Stride has positioned itself as a frontrunner in transforming the education industry. Given the growth potential, Stride seems attractively valued with a forward price-earnings ratio of 12.
