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Why K12 Stock Just Dropped 11.5%

By Rich Smith - Updated Aug 26, 2020 at 11:25AM

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K12 is growing fast -- but it's growing its debt load, too.

What happened

Shares of e-learning specialist K12 (LRN -0.99%), which develops curricula and software for students studying at home, dropped 11.5% through 10:10 a.m. EDT.

It's not immediately clear why.

Cartoon characters confused by stock chart arrow falling and crashing into floor

Image source: Getty Images.

So what

K12 made two announcements last night after close of trading. The good news is that, through Friday, the company says it has enrolled 170,000 students in its managed public school programs, a 39% year-over-year increase. That number could still go up through September as the school enrollment season continues, but already 39% growth in enrollments appears to be running ahead of analyst estimates for 25% growth in revenue this year. If enrollments translate directly into revenue, then it would appear K12 is in the advanced class this year.    

And yet, the stock is down, not up. Why?

Now what

I can only imagine that the falling stock price has more to do with K12's second piece of news from last night, in which it announced its intention to raise $300 million from the sale of convertible senior notes due 2027.  

On the one hand, K12 says it intends to use the proceeds from this capital raise to pay off "all of the outstanding balance under K12's credit facility" (i.e. roll over its debt). On the other hand, though, some of the new money will be used "for general corporate purposes," and so it seems the idea is to increase K12's overall debt load, at least modestly. Moreover, because this is convertible debt we're talking about, it has the potential to convert into common stock at some point, diluting existing K12 shareholders.

This, at least, seems to be what's unsettling K12 investors today.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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