What happened

Shares of distance-learning company K12 (LRN 0.45%) 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.

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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.