Stride stock holds $117 target despite DoE closure fears

On Friday, Stride Inc. (NYSE:LRN) shares experienced a significant decline, dropping 13%, following a 5% fall on Thursday. The drop is attributed to concerns over the potential shutdown of the Department of Education (DoE), as announced by DoE Secretary Linda McMahon. President Trump is reportedly planning to sign an executive order to close the department. Stride, a company that operates K12 virtual schools, is perceived to be vulnerable to such a move. According to InvestingPro data, the company maintains strong financial health with a "GREAT" overall rating and holds more cash than debt on its balance sheet, suggesting resilience to potential regulatory changes.

Morgan Stanley (NYSE:MS) analysts maintained their ’Equalweight’ rating on Stride stock and reiterated a $117.00 price target, which aligns with the stock’s current valuation according to InvestingPro’s Fair Value assessment. They addressed the market’s reaction to the news, emphasizing that the majority of K12 school funding in the United States is sourced from state and local governments. In fact, federal sources contribute less than 10% to K12 funding, and for Stride, this figure is less than 5%. The company’s strong liquidity position, with current assets exceeding short-term obligations by 6x, further supports its operational stability.

The analysts also pointed out that the executive branch alone cannot dissolve the DoE without Congressional approval, which would likely require a supermajority of 60 votes. Given these factors, they consider the market’s reaction as exaggerated.

Before the recent decline, Stride’s stock had risen 36% year-to-date, with an impressive 119% return over the past year. Morgan Stanley suggests this strong performance may be amplifying the current pullback due to the DoE dissolution concerns. Despite the sharp decline in share price over the past two days, Morgan Stanley’s position on Stride remains unchanged, with the firm finding the market’s response to be overstated in light of the company’s limited federal funding exposure and the low likelihood of the DoE’s actual dissolution. The company’s robust 13% revenue growth and strong cash flows suggest fundamental strength beyond regulatory concerns. Discover more insights about Stride’s financial health and growth prospects through the comprehensive Pro Research Report available on InvestingPro.

In other recent news, Stride Inc. has reported a strong financial performance for the second quarter of 2024, surpassing analyst expectations. The company achieved earnings per share (EPS) of $2.03, exceeding the forecasted $1.92, and reported revenue of $587.2 million, which was above the anticipated $562.39 million. These results reflect a 16% year-over-year increase in revenue, driven by record enrollment numbers reaching 230,000 students, up 19.4% from the previous year. Following this robust performance, Stride raised its full-year revenue guidance to a range of $2.32-$2.355 billion.

In response to Stride’s impressive quarterly results, BMO Capital Markets raised the company’s stock price target to $134, maintaining an Outperform rating. This adjustment reflects BMO’s confidence in Stride’s consistent ability to exceed financial expectations. Stride’s management has attributed its success to market share gains achieved through effective execution, particularly in the General Education and Career Learning segments.

The company continues to focus on enrollment growth and retention, with plans to enhance its platform and explore new market opportunities. Stride’s management highlighted the importance of its strategic initiatives, such as the nationwide rollout of K-12 tutoring, which is expected to be strategically significant despite not being financially material in the short term. The company’s ongoing investment in innovation and platform improvements underscores its commitment to sustaining growth momentum.

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