Stride Stock is Trading at a Premium Than the Industry: Buy or Fold?

Stride, Inc. LRN is currently trading at a premium compared with the Schools industry peers but is undervalued in contrast to the broader Consumer Discretionary sector. The company’s forward 12-month price-to-earnings (P/E) ratio is 16.79X, above the industry average of 15.11X and below the sector’s valuation of 17.66X.

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The shares of this provider of K-12 education have gained 12.6% in the past three months against the industry’s 0.6% decline, the sector’s 7.9% downturn and the S&P 500 index’s 7.4% downtick. During the same time frame, LRN also outpaced a few of the renowned industry players, including Universal Technical Institute, Inc. UTI, Adtalem Global Education Inc. ATGE and American Public Education, Inc. APEI. The detailed price performance of the industry peers is shown in the chart below.

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The ongoing hints of minimizing the regulatory impact of the U.S. Department of Education in the market are proving favorable for education companies like Stride. Apart from this market catalyst, the company’s in-house initiatives, like offering virtual and blended educational programs, are boding well.

The overvaluation of LRN stock compared with its industry peers indicates its strong potential in the market, given the favorable trends backing it up. This trend justifies its valuation, validating its Value Score of B.

What Factors are Aiding Stride’s Momentum?

Upbeat Fiscal 2025 View: After moving halfway through fiscal 2025 with year-over-year revenue growth of 15.6% and adjusted operating income increasing significantly by 76.9%, Stride unveiled its updated outlook for fiscal 2025, with an increased third quarter of fiscal 2025 view.

For the fiscal third quarter, the company expects revenues to be in the range of $585-$600 million, up 12-15% from $520.8 million reported in the year ago quarter. The adjusted operating income is expected to be between $130 million and $140 million, indicating 35-45% year-over-year growth from $96.4 million. For fiscal 2025, LRN currently expects revenues to be between $2.32 billion and $2.355 billion (up from the previously expected range of $2.225-$2.3 billion), up 14-15% from $2.04 billion reported in fiscal 2024. The guidance for full-year adjusted operating income has also been increased to the range of $430-$450 million (significantly up from $$293.9 million reported in fiscal 2024) compared with the previous guidance range of $395-$425 million.

Focus on Achieving 2028 Targets: Stride is currently focusing on meeting its fiscal 2028 targets, favored by the ongoing regulatory reform trends and its strategic business initiatives. Under the fiscal 2028 targets, LRN expects revenues to grow in the range of $2.70-$3.30 billion, reflecting a 10% compound annual growth rate (CAGR) from fiscal 2023. Adjusted operating income is projected to be between $415 million and $585 million (with a 20% CAGR). Also, earnings per share (EPS) are expected to be between $6.15 and $8.35, with a CAGR of 20%.

The new reforms in the education industry under President Trump’s administration are likely to lead to fewer regulations. This, coupled with LRN’s diversified blend of educational programs, focus on capitalizing on advanced software and implementing curriculum development, positions it well to achieve the fiscal year’s goals without much hassle.

Synergies From Cost-Saving Efforts: Despite an inflationary market scenario, Stride is undergoing cost cuts and expanding its margins through various cost-reduction initiatives. The company ensures efficient utilization of its free cash flow to enhance its business activities and reward shareholders. As of Dec. 31, 2024, its cash, cash equivalents & marketable securities were $717.5 million, with a long-term debt of $415.5 million. The numbers indicate the company’s sufficient liquidity position to pay off its debt obligations.

Estimate Trend Favors LRN

The upbeat fiscal 2025 view, coupled with the favoring market fundamentals, is likely to have boosted the analysts’ expectations, reflecting an upward revision of the year’s earnings estimates in the past 60 days. As visible from the chart below, the earnings estimate for fiscal 2025 indicates a 42.2% year-over-year growth rate, with the fiscal third quarter showcasing a 25.6% rise.

EPS Estimate Revision

Image Source: Zacks Investment Research

LRN’s ROE Trend

The company’s trailing 12-month return on equity (ROE) reflects its growth potential and focus on maintaining shareholder value. As evidenced by the chart below, LRN’s ROE is significantly better compared with the industry.

Image Source: Zacks Investment Research

Headwinds to LRN’s Prospects

Despite being favored by macro aspects and undergoing strategic business initiative implementation to drive enrollment, Stride is not completely immune to macro headwinds like the persisting inflationary environment. The ongoing inflated market scenario continuously poses a threat to the company’s margin expansion efforts and is likely to linger for some time. Besides, continued low contributions from its Adult Learning business, under the Career Learning segment, is adding to the headwinds.

What are the Thoughts on Investment?

Per the above discussion, the hints of reduced regulation on the education industry surrounding the market, accompanied with various in-house strategies including cost-saving initiatives, long-term business targets and diversified product offerings, are encouraging for Stride’s growth trend in the upcoming period. Moreover, this uptrend can be reflected by the upward revision of the fiscal 2025 earnings estimate trend.

However, the lingering sticky inflation and Adult Learning business’ soft contributions are clouding the judgment of the investors regarding any actions to be taken in favor of LRN stock.

Thus, by considering both sides of the coin, it is prudent for existing investors to hold on to this Zacks Rank #3 (Hold) company’s shares for now, whereas new investors might want to wait for a more favorable entry point.

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This article originally published on Zacks Investment Research (zacks.com).

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