K12 Pops 10% As Online Education Demand Boosts Earnings

Shares of K12 were advancing 10.5% in pre-market trading today as the online education services provider beat analysts’ expectations for the first quarter of fiscal 2021, ended Sept. 30.

K12’s (LRN) 1Q FY21 revenue increased 44.3% year-over-year to $371 million, surpassing analysts’ forecast of $362.6 million. The top-line benefited from a 57% rise in enrolment to over 195,000 as the demand for online learning has surged since the COVID-19 outbreak. Yesterday, K12’s rival Chegg (CHGG) reported revenue of $154 million, reflecting Y/Y growth of 64% for the third quarter ended Sept. 30.

Meanwhile, K12’s adjusted EBITDA jumped significantly to $39.2 million in 1Q FY21 from $3.3 million in 1Q FY20. Strong revenue growth and improved operating leverage helped the company in delivering EPS of $0.30 in 1Q FY21 compared to a net loss per share of $0.25 in 1Q FY20. Analysts were expecting a loss per share of $0.32.

Based on strong demand, the company expects 2Q FY21 revenue between $358 million to $366 million and FY21 revenue between $1.445 billion and $1.470 billion.

Last month, William Blair analyst Stephen Sheldon reiterated a Buy rating for K12 and stated that the selloff in K12 shares following the loss of the Miami-Dade institutional business contract was overblown. He feels that the announcement is a “small incremental negative to the story,” but not one that justifies the extent of the decline in the shares following the news.

Sheldon also noted that the Miami-Dade contract has nothing to do with K12’s core business and that the $15 million transaction would only have accounted for about 1% of current forward revenue estimates. Moreover, there were also meaningful costs in the first year that could limit profitability, said the analyst. (See LRN stock analysis on TipRanks)

Overall, the Street has a Strong Buy consensus for K12 based on 4 unanimous Buys. Shares have risen 39% so far this year and the average analyst price target of $55 indicates significant upside potential of 95% for the months ahead.

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