Stride used to be K-12, a for-profit company aimed at providing on-line and blended learning. It was founded in 2000 by Ron Packard, former banker and Mckinsey consultant, and quickly became the leading national company for cyber schooling.
One of its first big investors was Michal Milken. That investment came a decade after he pled guilty to six felonies in the “biggest fraud case in the securities industry” ending his reign as the “junk bond king.” Milken was sentenced to ten years, served two, and was barred from ever securities investment. In 1996, he had established Knowledge Universe, an organization he created with his brother Lowell and Larry Elison, who both kicked in money for K12.
We are short Stride Inc (fka K12 Inc.) (NYSE:LRN). We believe Stride, a K-12 online education company, is the last Covid over-earning stock yet to fall. The stock is near its highs (+60% YoY) but investors are clueless about the looming Covid funding cliff. Investors don’t know because Stride management has NOT told them. Instead, management has said over and over again that the company received little to no benefit from the $190 Billion of federal Covid funds (called Elementary & Secondary School Emergency Relief Funds, or “ESSER”). Former Stride executives told us that management misled investors.
Let's take the issues one at a time.
ESSER shenanigans
Stride told its investors that their exceptionally great profits over the past four years were the result of the Elementary & Secondary School Emergency Relief Funds, the covid relief funds aimed at schools. CEO Rhyu told investors over the years that the company wasn't really seeing many of those dollars and wouldn't have to adjust when they went away.
Since those funds came with few strings attached, Stride just sort of shuffled them into a closet, then opened the closet and said, "Look at all these profits we found! What a good job we're doing!" Some of the funds were used to cover operational losses, but Fuzzy Panda estimates that over 25% of the EBITDA (earnings before interest, taxes, depreciation, and amortization) was simply those covid relief funds-- about 50-75% of them.
In other words, taxpayer covid relief funds just went straight to the company's bottom line. Executives told them "it was a little bit of a shell game."
This does not matter to investors because of any outrage over misuse of government funds. But what it means to investors is that, since ESSER funds are now done, Stride is about to lose a major source of profit.
But there are other issues.
Ghost students
Stride collected millions of dollars for students it was not actually educating. Fuzzy Pandas breaks this down into two groups.
Invisible ghosts are fake students who simply don't exist. FP estimates 5-10% of their total enrollment is these non-existent students.
Truant ghosts are the students that Stride pushes to show up on the days when the state counts the initial enrollment. Then they disappear.
FP reports that Stride actually cut the staff responsible for tracking attendance and chasing down truant kids.
For investors, the big question is this-- Kamala Harris cracked down on Stride in 2016 over ghost students and forced them into a $168 million settlement. Would we see a repeat of that in a Harris administration? Sure would be expensive if, as they put it, "the ghostbuster returns."
Undisclosed loss of schools
Seven schools have left the Stride fold since 2021; investors don't know about this because it's kept hushed. FP predicts the "undisclosed churn" will continue because many Stride schools are unhappy, Management talks "about opportunity to add schools in 19 states – but Stride already has been kicked out of 9 of those states."
The lack of disclosure started when Rhyu stepped into the CEO spot.
Allegations of overbilling and fraud and poor performance
These have followed K12/Stride since forever. Overpriced hardware, class change charges, and a fake shell company that further allowed them to inflate enrollment. Also, FP figured out what many of us already know-- the ratings for Stride in particular and cyber-charters in general are low. Will these combine with post-pandemic scenery to bring drop in enrollment?
Finally, the CEO is...well...
In discussing James Rhyu's "colorful leadership style," FP says that "the phrase asshole came up frequently." Rhyu was promoted from the position of Chief Financial Officer. I've read hundreds of pages of his depositions, and as those he comes across as slippery, evasive, and weaselly. Here's an exchange that FD mined from a deposition:
Q: Mr. Rhyu, are you a man of your word?
Rhyu: I’m not sure I understand that question.
Q: Do you do what you say you are going to do, sir?
Rhyu: Under what circumstances?
Q: Do you do what you say you are going to do, Mr. Rhyu?
Rhyu: That’s such a broad question. It’s hard for me to answer.
Former execs also told FP about incidents of rage and bullying. "management by fear, bullying control freak."
Fuzzy Panda has a wealth of details and links and has brought all the receipts. They even offer twelve questions that investors should ask management of Stride.
Investors appear to have already started to react to the news that despite not acknowledging it, Stride is about "to fall off a Covid cliff." We'll see what happens. This is all news for the investment world, the world that Stride is very interested in. For those of us in the education world, the news that Stride is shady, shifty, and operating unethically while pretending to be an education business--well, that's not news at all. But if the news could get out to other folks, that would be great. If you are in Pennsylvania, forward the Fuzzy Panda article to your legislator and ask them if they're ready for some cyber charter reform yet.
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