Stride (LRN): Buy, Sell, or Hold Post Q3 Earnings?

Shareholders of Stride would probably like to forget the past six months even happened. The stock dropped 50.2% and now trades at $68.80. This was partly due to its softer quarterly results and might have investors contemplating their next move.

Following the pullback, is this a buying opportunity for LRN? Find out in our full research report, it’s free for active Edge members.

Why Is LRN a Good Business?

Formerly known as K12, Stride (NYSE:LRN) is an education technology company providing education solutions through digital platforms.

1. Growth in Enrollments Shows Increasing Demand

Revenue growth can be broken down into changes in price and volume (for companies like Stride, our preferred volume metric is enrollments). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Stride’s enrollments punched in at 247,700 in the latest quarter, and over the last two years, averaged 15% year-on-year growth. This performance was fantastic and shows its services have a unique value proposition.

2. Increasing Free Cash Flow Margin Juices Financials

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Stride’s margin expanded by 7.4 percentage points over the last five years. This is encouraging because it gives the company more optionality. Stride’s free cash flow margin for the trailing 12 months was 12.6%.

3. New Investments Bear Fruit as ROIC Jumps

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Stride’s ROIC has increased significantly over the last few years. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

Final Judgment

These are just a few reasons why we think Stride is an elite business services company. After the recent drawdown, the stock trades at 8.2× forward P/E (or $68.80 per share). Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free for active Edge members .

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