K12 Inc. (NYSE:LRN) is a leader in online education and curricula from grades kindergarten through 12th grade (thus the name). This public company gained big initially when lockdowns were instituted as public and private schools across the globe turned to virtual homeschool solutions for distance learning.
With the world expected to return to some level of normalcy, investors are wondering – is K12 stock a Buy?
Schools are still unsure of how to handle the next school year. Districts that reopened face new closures as the flu season picks up. Those that remained closed ran into various issues with online learning. The coronavirus lockdowns define the culture and society these days.
We explore K12 to determine if this is a textbook case of an excellent growth startup or if it’ll fail to pass the test of reopening schools.
K12 Enabled Educators In A Virtual World
K12 managed e-learning for school curriculum. This includes core subjects, like math, science, English, history, and creative arts. Its product line also includes both virtual and offline courses, especially for early education in elementary schools.
Its learning courses are designed to be completely turnkey, while meeting all local educational requirements. It allows students, teachers, and parents to participate on various levels, while combining online learning with textbooks, worksheets, and a comprehensive approach to learning.
State-certified coaches are used to provide online learning while in-classroom learning can continue uninterrupted. The company also operates three of its own online private schools: K12 International Academy, George Washington University Online High School, and the Keystone School.
This gives the company a level of vertical integration that opens several revenue streams and can continue to keep it profitable. The elephant in the room is how important online learning will remain in the coming school year and beyond.
Is K12 Stock a Buy?
K12 Inc stock fell during the coronavirus crash to a 52-week low of $15.06 before reaching an all-time high price of $52.84.
It didn’t hold that value for long and soon dipped under a $1 billion market capitalization. It has a P/E ratio of 19x and reported increased revenues for its first quarter in the 2021 fiscal year.
Its revenue of $371 million was a 44.3 increase of the same quarter in the prior year, in which it earned $257.1 million. This pushed its net income to $12.7 million for the quarter, a big improvement from the $9.7 million net loss it reported in the fiscal year 2020 first quarter.
These numbers fueled investor interest, but prices were driven immediately down when Pfizer announced positive results for its coronavirus vaccine. This signals that whether its true or not, the market believes a vaccine will make the company less valuable. In fact, let’s explore the investor risk for K12.
Risks of Buying K12 Stock
Although K12 gained exposure from the coronavirus pandemic, that same crisis could also be its undoing.
Revenues gained in 2020, but it needs to work hard to maintain its current status. It was already struggling to reach and maintain a $1 billion market cap in 2019, and the virus only accentuated this problem.
The company needs to make clear its roadmap for the future and how it plans to integrate into schools who move away from a virtual environment. This expanse is necessary to ensure it continues being used.
At this point, it’s a buyer’s market. Schools can demand whatever they need to maintain budgets, and this could impact the company.
It also spends a big amount on advertising and lobbying. A changing of the President means a lot of positions appointed during the Trump administration could be replaced.
This includes Secretary of Education Betsy DeVos, whose may lose her position to an administrator with a different political bias. This could be a problem for the company, as shifting needs could bottleneck its growth potential.
There’s also the problem of competition, as K12 isn’t the only player in elementary, middle school, and high school education.
A Long List Of K12 Competitors Threaten
Online learning is a crowded market, including companies like Haiku Learning, Pearson Successnet, Blackboard, and Shoolology.
This creates a lot of rivalries the company needs to get over, but that’s just one piece of the pie.
K12 focuses entirely on the K-12 educational system, but there are plenty of online learning platforms looking for a piece of that pie.
Many of them also offer e-learning courses for university-level students and professionals. These are two untouched markets that K12 needs to explore if it wants to continue growing in 2021 and beyond.
These companies include Pluralsight Skills, LinkedIn Learning, Udemy, Udacity, and Coursera. Even Google (GOOG) has a learning management system (LMS) in Google Classroom.
These platforms could easily be adopted by school districts, especially in the case of Google and Microsoft’s LinkedIn, which have deep enough pockets to underprice their solutions.
K12 needs to focus on continued sales if it wants to grow past the coronavirus bump.
Is K12 Stock A Buy? The Bottom Line
K12 became an essential service during the coronavirus pandemic. This is because its online learning platform forms the foundation of distance learning. That was vital to the success of the 2020-2021 school year, but the November announcement of a coronavirus vaccine pummeled the company’s market cap.
The market stopped focusing on virtual tools, and the technology sector was hit hard in November. K12 dropped below $1 billion, leaving some investors believing it’s a value buy.
Coronavirus concerns are rising toward the end of the year. Flu season is another concern. These diseases could cause schools that opened to re-close and push to a virtual classroom.
However, should things return to normal, demand for this platform will drop, and that’s likely to occur for the 2021-2022 school year. K12 needs to diversify its revenue before then, or it risks disappointing investors.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.