States are indeed cash strapped. But this is another reason why K12 will continue to do well. A student using K12 costs the state about 1/2 what it would cost to educate that student in a bricks and mortar school. Why would the state turn around and not allow virtual schools when they are saving money on the margin?
As for the type of students who use K12, Packard has been very upfront that many of K12 students are those who have not done well in a regular school. The criteria of success with K12 for those students is not how they do compared to regular students - they start well behind when they begin - but is if they begin to catch up somewhat in K12. K12 also offer a flexible for military families, for those who oppose the culture of regular schools and those who homeschool for religious reasons.
You are incorrect on the cost dynamics because you have not looked closely enough at the financials. Net profit is skewed by many things including acquisition costs, integration costs, etc. A better metric is EBIDTA. And here K12 has done very well. Here are the EDITDA in 1,000s for the past few years:
Cash flow, another excellent metric has also grown rapidly.
I'd say they are scaling very nicely.
I do have a healthy does of skepticism for for profit educational companies because most of them are at the college level and are dependent on federal loans for their students. K12, however, is exclusively at the 1-12 grade level and not dependent on loans. They have both a price and quality advantage over the brick and mortar schools when comparisons are done on an apples to apple basis.
K12 now sells for an EV/OCF ratio of just 7.9 (5.5 if the net receivables are included as cash). The PE based on EBIDTA is 11. The PS is just 1.2 and the EV/sales is only 1. Those are all very low numbers for a company growing as fast as is K12. I am very comfortable with my investment in K12 and expect it to be quite profitable. If you disagree, fine. That's why they have a stock market.