Please ensure Javascript is enabled for purposes of website accessibility

Here's Why K12 Stock Went Down on Wednesday

By Jon Quast – Updated Aug 12, 2020 at 4:18PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors were expecting the COVID-19 pandemic to have an immediately positive impact on K12's business.

What happened

Shares of distance-learning company K12 (LRN 0.08%) fell on Wednesday, after full-year results for the company's fiscal 2020 didn't live up to investors' elevated expectations. Excluding its acquisition of Galvanize, revenue was only up 1% year over year, while net income was up 3%. Including the acquisition, revenue was still only up 2.5%, and the company recorded a 34% drop in net income.

Results like this don't correlate with K12's stock performance in 2020. The stock had more than doubled year to date, as investors expected results and guidance to reflect strong growth trends due to the COVID-19 pandemic.

LRN Chart

LRN data by YCharts

So what

If K12's fourth-quarter and full-year results caught anyone off guard, it was common retail investors. The company's top and bottom line beat analysts' expectations for Q4. But retail investors expected more. Popular research firm Citron Research had set a $100 price target for K12 stock before the end of the year, calling it "the Teladoc of online education."

Being compared to a popular stock by a popular research firm had a dramatic effect, sending K12 stock 68% higher in July alone. But expectations were too high.

Teladoc enjoyed immediately accelerated adoption during the COVID-19 pandemic, but this wasn't the case with K12. The stock was down 4% today on disappointment, but there's a reasonable explanation for the disparity between Teladoc and K12: These are vastly different businesses. 

In the Q4 conference call, K12 CEO Nathaniel Davis said:

Due to state laws and policies by authorizers and local school boards, many K12 powered schools were restricted from taking new enrollment later in the school year, just before the pandemic hit the country. Therefore, the fiscal '20 impact on our revenues was very small.

In other words, if the coronavirus created demand for distance education, the company wasn't able to capitalize on the trend until the new school year.

A red, upward arrow is broken near the top, resulting in the arrow's tip pointing down.

Image source: Getty Images.

Now what

Investors may be selling K12 stock too early. The company refrained from giving formal guidance, deferring that until it reports fiscal first-quarter results in October. However, there are many indicators suggesting adoption is accelerating. First, public school enrollment for the upcoming first quarter is already up 23% from last year. Second, enrollment applications in Q4 were up 50% year over year. Finally, the company is hiring 1,300 new teachers to meet rising demand.

All of this points to a strong year of growth and adoption for K12, which might make this stock a good combination of growth and value after today's sell off. 

Jon Quast has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Teladoc Health. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

K12 Stock Quote
$35.69 (0.08%) $0.03
Teladoc Health Stock Quote
Teladoc Health
$27.60 (-3.40%) $0.97

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.