I like Seeking Alpha because it gives a wide variety of opinions from voices one often does not hear. However, Mr. Pardini analysis is extremely shallow and contradictory. To wit;
"Even with high growth, the company still has a poor return on investment capital at 3.4%, and has a negative free cash flow of -$1.5 million on $15 million in net income over twelve trailing months. Part of this shortfall is due to the need to finance growth. However, by this stage of the company's life cycle, investors should expect profitability from low cost online education company."
LRN's end of year cash flow in 2011 was $67 million, almost exactly the same as its EBIDTA. The only reason the TTM cash flow was so low was because of a big ($118M) increase in receivables in Q1 2012. There is no reason to believe they won't collect this money next quarter. As for profitability K12 is quite profitable on an EBIDTA basis. The only reason GAAP net has been held down is because of numerous acquisitions which cause large upfront costs and will only pay off over the long run. EBIDTA has been ramping up very nicely over the past few years.
Mr. Pardini then moves onto the business model with this wild claim:
"K-12 lacks a substantial track record of placing its students in prestigious universities. Until K-12 has successive classes of college placement on par with top public schools, ambitious and diligent parents / students will not allow their child (or choose to attend themselves) to opt out of traditional school."
Really? A simple glance at K12's website shows that they have indeed placed student in "prestigious universities". But the point is irrelevant. The main purpose of K-12 education is not to get the student into prestigious schools but to teach them to read, write, and calculate and perhaps learn a little history. And here he contradicts himself. If parents are not allowing their kids to opt out of traditional schools then why is K12 growing so fast as he admits in the article? Parents and students are turning to online schools and homeschooling because the traditional schools have failed so miserably despite higher and higher spending. And comparing K12 to the "top public schools" is obviously unfair. Why not compare K12 to the schools the students are actually leaving?
Here's another howler:
"Based on the schooling experience of both myself and younger family members, online classes are still largely regarded as an easy way out of regular classes."
Wow, someone in his family once took an online course and didn't like it! That's quite a control group to make such a sweeping generalization.
"The primary reason this stigma remains is that there is no way to prevent cheating (which is significantly easier online) through the online model. It is too easy to look up Wikipedia or Yahoo Answers during a test. Since parents are usually the "learning coach", students can either take the tests when the parents are at work, or the parent may even comply to help their student gain an edge in a intensely competitive college placement market."
This one is just too silly to comment on. As if no one can cheat at a regular school.
"Overall, due to its lack of a track record of college placement, society's skepticism of homeschooling, a high valuation in a bear market, and negative free cash flows, I expect K12, Inc. to underperform for the next 1-2 years."
We'll see. K12 is selling to about 25 right now and I think it is worth at least 35. I doubt if Mr. Pardini will do a follow up in 2 years.
FUNDAMENTALS have NOT changed on this company! Only thing that has changed is some dumba$$ has voiced AN OPINION! What has changed is the VALUE of this company and right now LRN ON SALE, and VERY CHEAP now...