Stride, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Stride, Inc. is a technology-based education services company that provides online learning programs and curricula to students of all ages, focusing primarily on K-12 education.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Stride, Inc. is a leading provider of online education solutions, primarily serving students from kindergarten through 12th grade (K-12). Its services include virtual schools, online course programs, and career learning programs. The company’s offerings address both the general education market through online schooling for public and private schools as well as the career learning and professional skills markets by providing education and skills training, with a focus on preparing students for future employment in high-growth fields like technology, health care and general business. While Stride has grown rapidly, it still represents only 2.4% of the U.S. K12 market.

  • Revenue Distribution:

Stride derives its revenues from two primary segments: General Education and Career Learning. General Education, which forms the large majority of revenues, is derived from tuition payments from its virtual schools and from the sales of its curriculum products and services to brick-and-mortar schools, while Career Learning includes post-secondary career-focused programs and related services.

  • General Education: This segment serves students from kindergarten to high school, mainly through virtual public and private schools, as well as selling curriculum and technology to brick-and-mortar schools.

  • Career Learning: This segment delivers education programs and services focused on developing skills and helping students to prepare for future employment, mostly in high-growth sectors like technology, health care, and the general business sector.

  • Industry Trends:

The K-12 virtual learning market is experiencing long-term growth due to several factors including increasing acceptance and understanding of online learning, growing demand for flexible and personalized educational experiences, and new technology adoption. Although brick-and-mortar schools still comprise the biggest part of the K12 market, the adoption of technology by schools is growing rapidly, including blended learning, and full-time online education. The career learning market is evolving as well, with increasing demand for job-specific skills training and certification, and a growing need for flexible options for people seeking new careers or advancements. The competitive landscape is also evolving, as new entrants and acquisitions change the marketplace for virtual learning providers.

  • Margins: The company generally operates with gross profit margins ranging from 60-70% while operating income margins are typically between 4% to 10% of revenues, excluding nonrecurring items. In the past year, adjusted EBITDA margins have fallen from 13.5% to 10.5% due to the effect of reduced margins from their Career Learning business.

  • Competitive Landscape: Stride faces competition in all segments of its business. In K12 education, other major virtual school providers, such as K12 (KRN), Pearson and Connections Academy, are competitors. They also compete with brick-and-mortar school districts who offer online options. The competitive environment is also made more challenging because the market, although rapidly growing, is still fragmented. In the career market, the company competes against brick-and-mortar schools, but also with specialized training providers. These are often small local providers and companies like Coursera, Udemy, and edX, which are more flexible in terms of content.

  • What Makes Stride Different: Stride differs from other companies by providing high-quality curriculum and tech-based learning solutions to its customers for a wide variety of education fields, they can combine a full time K12 education and different areas of career prep. The platform offers students the flexibility of virtual schooling while providing a wide variety of career-focused training and certificates.

Financial Analysis:

Stride’s financial picture is influenced by its balance between growth investments and maintaining stable financial health. They have shown significant revenue growth in the past five years, going from about $400 Million to about $1.7 Billion annually. The company is targeting organic growth rates of 10-12%.

  • Income Statement: Stride’s revenues have increased by 17% to 1.77 Billion, but their net income decreased by 41% to 56.8 Million. The decrease in net income was mainly driven by increasing costs and selling, general and administrative expenses, along with a decrease in interest income and a smaller benefit from deferred income taxes. The overall gross profit is about 38% of revenues, implying 62% of revenue is spent on their operating costs. Their current EBIT margins sits at 7.9%, but is expected to remain in the low double digits.
  • Balance Sheet: Stride has a relatively stable balance sheet, with a history of no long-term debt. Its total cash and marketable securities position sits at around 497.8 million which are all convertible to cash. Although this is not much cash relative to the size of the business, the overall debt is very small relative to equity-with total equity of 880 Million.
  • Cash Flow: Stride’s cash flow from operations has consistently been positive, with $219 million in cash flow from operations this past year. With capital expenditures of around $70 million, the business can self-fund and has no need for external financing, which gives the company flexibility in their operations.

  • Management Discussion and Analysis: Management believes they are in a unique position to profit from the growing demand for virtual learning, given the flexibility and large amount of varied curriculum they offer. They are actively working towards increasing enrollments in their platform by marketing it better, providing a smoother signup process, and optimizing their platform for an easier user experience.

  • Recent Problems, Concerns, and Controversies: The company faces challenges in increasing enrollments given the changing preferences of parents towards in-person learning after the pandemic. Their earnings have been volatile from quarter to quarter, although they have met their long-term growth targets. The company has also been the target of criticism, with the US Department of Education starting a probe into some practices of a subsidiary company. Management insists on having corrected any misgivings the agency might have had and is fully cooperating with the department.

Moat Analysis:

  • Intangible Assets: Stride possesses a strong brand recognition in the online education space which can give them pricing power. However, this advantage is not fully solid as the market continues to grow and it’s easy for new entrants to appear. Their technology stack is strong and also provides an edge over companies with less mature tech capabilities.
  • Switching Costs: While switching costs can exist for students who have spent years on the platform, most courses and teaching services can easily be swapped out with other platforms. That means that a potential student may change to another platform just because it seems better and may not be tied to Stride.
  • Network Effects: Stride does not have a strong network effect in their business. Even if many people use Stride’s services, it won’t improve any one single student’s performance.
  • Cost Advantages: The company benefits from economies of scale in delivering digital content. However, the cost of creating and maintaining high-quality online education is high, so it does not provide a huge cost advantage compared to competitors.

Moat Rating: 2 / 5

Stride has some elements of a competitive advantage. Their brand name and strong technology gives them a slight edge over some of their competitors, but it’s not strong enough to consider a solid moat. They need stronger switching costs or a network effect to be a stronger business.

Legitimate Risks and Business Resilience:

  • Risk 1- Increasing competition: The biggest risk is the market becoming more competitive and being flooded with providers that have similar product offerings or are able to offer prices that are lower than that of Stride. This poses a threat to their margins and reduces their ability to attract new customers.

  • Risk 2-Changing preferences for online education: Demand for fully virtual public schools was at its apex during the pandemic, but parents may prefer brick-and-mortar or blended models in the future and, therefore, lower the number of students in a fully virtual program.

  • Risk 3-Accreditation and regulatory risk: Changes in the regulatory environment or the loss of accreditation by educational authorities could impact the ability of Stride to continue offering its services and may lead to a loss of users and credibility, further damaging revenues. The government is also a key stakeholder in the business’s success.

  • Business Resilience:

Stride is more resilient than its competitors, given its established reputation as one of the bigger public online education providers. The company also has a diversified revenue model, by being able to cater to different segments of the market, including K12 students, adult learners, and career-focused services. Its tech platform is also well-developed allowing it to transition towards newer learning technologies and solutions, and to better adapt to different methods of teaching. Finally, its strong cash flow generation, no debt, and high cash position provides financial stability to overcome any temporary issues that it might face.

Understandability Rating: 3 / 5

While the business model is easy to understand, the intricacies of how each segment works, how government regulations, accreditation and different market dynamics play into its success can sometimes be hard to fully grasp, or require deep knowledge of the industry.

Balance Sheet Health Rating: 4 / 5

Stride’s balance sheet is in relatively good condition, with a low debt-to-equity ratio and high cash reserves. The ability to generate and convert profits into cash is also impressive. However, the company’s current liabilities are also high, so some of its assets are tied up in inventory or accounts receivables. They have no long-term debt.