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An Analysis Of K12 And Why It Is My Largest Short Position

Sep. 22, 2013 10:38 PM ETStride, Inc. (LRN)25 Comments
Whitney Tilson profile picture
Whitney Tilson

Last Tuesday at the Value Investing Congress, I gave a 123-slide presentation (posted here) about my largest short position, K12 (ticker: LRN). In it, I shared the many reasons why I think the company (and the entire sector) have run amok and why, at 46x earnings, I think the stock is a fantastic short.

The Bull Case for K12

There are many reasons that explain the bullishness of some investors and nearly all analysts (seven of the eight who follow the stock have a buy or strong buy on it). First, K12 has grown its revenue 32% annually over the past decade, as this chart shows:

Revenue ($M)

And analysts are projecting revenue and EPS growth of 16% and 32%, respectively, over the next 12 months, fueled 10 new schools and enrollment cap expansion of 17,000 new seats. And K12 has less than $1 billion in revenue in a market that it says could become as large as $15 billion annually.

It’s also important to note that online schools sector – schools in which students are supposedly learning by sitting at home all day in front of a computer, interacting with teachers almost exclusively online – can be an excellent option for certain students – for example, children whose pace is extremely accelerated, entertainers, solo athletes, teenage mothers who need to stay home with their babies, victims of bullying, children with cancer, seizure disorders, peanut allergies, etc.

K12 has a well-regarded curriculum, reports very high parental and student satisfaction, and has strong political support, especially among Republicans, for giving parents school choice. Finally, it’s operating in a space, online learning, that has enormous buzz (think MOOCs, etc.).

So what’s not to like? Let me count the ways…

(Note that my critique is specifically of K12, not all online charter schools, for-profit charter