K12 (LRN) provides online education materials and services to students from kindergarten to 12th grade, where the online penetration rate is still below 1% and where the headwinds against higher-education companies do not necessarily apply, says Jeffrey M. Silber, Managing Director and Senior Analyst at BMO Capital Markets Corp.
“We’ve seen a secular change where students in the K-12 sector more and more are taking online classes. The online penetration rate in higher education is somewhere in the low teens, 12%, 13%. The online penetration rate in the entire K-12 sector is probably less than 1%. Yes, it’s never going to go to 12% or 13%, but can it go from 0.5% penetration rate to 1%? Certainly, and potentially even higher,” Silber said.
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Silber says LRN has received some negative attention due to its focus on lower-than-average students as they have expanded, but he says that despite the underperformance relative to traditional schools in the area, the company has outperformed the schools they compete against.
“LRN is the 800-pound gorilla in the space. They operate in over 30 states, with more to come, and they probably have more students than most of their competitors combined,” Silber said. “This is also one that we’ve been recommending throughout. Again, we’ve had some hiccups here and there, but it’s been one of the best-performing stocks in the group year to date.”