Stride Inc (LRN) – The Last Covid Over Earner – Hiding That Est >25% of EBITDA Came from Covid Funds – Fuzzy Panda Research
Stride Inc. faces critical financial challenges as $330M COVID relief funds expire, with allegations of ghost students, undisclosed school losses, and questionable billing practices threatening its K-12 online education business model and stock performance.
Fuzzy Panda Research has taken a short position on Stride Inc. (NYSE: LRN), alleging the K-12 online education company has misled investors about its reliance on temporary COVID relief funds that accounted for over 25% of EBITDA. With ESSER funding expiring in September 2024, the firm warns of an imminent financial "cliff," compounded by allegations of "ghost students," undisclosed school losses, and questionable billing practices under CEO James Rhyu's leadership.
Stock info:
- Ticker: LRN (NYSE)
- Position: Fuzzy Panda Research is short Stride Inc.
Why it matters:
- Hidden COVID Funding Dependence: Over $330 million in federal ESSER funds flowed to Stride schools, with 50-75% directly boosting bottom-line performance. Internal forecasts predict a 36% decline in high-margin technology and management fees post-ESSER.
- Ghost Student Enrollment Scheme: Two categories of phantom students artificially inflate enrollment figures – "Invisible Ghosts" (5-10% who never attend) and "Truant Ghosts" (20-30% who appear only during count periods) – allowing Stride to claim funding without delivering education.
- Undisclosed School Exodus: Seven schools have left Stride since 2021 without investor disclosure. Industry insiders expect continued annual losses of 1-2 schools due to board dissatisfaction, with contracts being negotiated for shorter terms.
- Fraudulent Billing Practices: A qui tam lawsuit alleges Stride created fictitious internship programs to access 300% higher government funding and engaged in overbilling (e.g., charging $400 for $300 Chromebooks).
- CEO Credibility Issues: James Rhyu was involved in a previous $168.5 million settlement with California's AG over similar issues. His deposition reveals contradictory statements about ESSER funding impact since 2021.
- Toxic Corporate Culture: Multiple accounts describe Rhyu's "rageholic" management style, including derogatory comments about students and staff, contributing to high turnover and deteriorating school relationships.
By the numbers:
- Despite claiming expansion into 19 additional states, Stride has simultaneously lost operations in nine states, creating a misleading growth narrative.
- Former executives revealed a practice of shifting students between General Education and Career Learning segments without their knowledge to manipulate growth metrics.
- Stride's historical EBITDA margins were 10-13% pre-COVID but temporarily surged to 19% during the pandemic due to unrestricted federal funding.
- COVID funds helped reduce school operating losses from -$555 per student pre-pandemic to just -$87 per student.
- Sell-side analysts appear unaware of the critical impact of ESSER funds on Stride's financials, mistakenly projecting continued margin expansion.
FAQs:
What is ESSER funding and why is it important to Stride's business?
ESSER (Elementary and Secondary School Emergency Relief) funds were federal COVID relief grants provided to schools. According to Fuzzy Panda Research, these funds contributed over $330 million to Stride schools with minimal restrictions, artificially boosting the company's profit margins by an estimated 25% of EBITDA. This funding expired in September 2024, creating a potential financial cliff.
What evidence supports the "ghost student" allegations?
The report cites testimonies from former executives and teachers who described systematic practices of maintaining non-attending students on enrollment records. These practices allegedly include automatic re-enrollment without parental confirmation, incomplete documentation, and delayed withdrawal processing to inflate student counts during funding periods.
Has Stride faced similar allegations before?
Yes. In 2016, Stride (then K12 Inc.) reached a $168.5 million settlement with California's Attorney General over allegations of inflated attendance figures and misleading advertising. Current CEO James Rhyu was CFO during that period.
What is the significance of the school churn issue?
The report claims Stride has lost seven schools since 2021 without disclosing this to investors. This contradicts the company's growth narrative and suggests deteriorating relationships with school boards, potentially threatening future revenue stability as schools represent Stride's primary customer base.
How does the "Covid cliff" impact Stride's financial outlook?
With ESSER funds expiring in September 2024, Stride faces a potential sharp decline in profitability. Internal forecasts from Ohio Virtual Academy cited in the report predict a 36% drop in high-margin technology and management fees, suggesting the company's recent margin expansion was temporary rather than structural.
What are the implications for Stride's stock price according to the report?
Fuzzy Panda Research suggests Stride's stock price (up over 60% year-over-year) is artificially inflated due to temporary pandemic-era margins that cannot be sustained after ESSER funding expires. The firm believes the stock will experience significant downward pressure as financial realities emerge post-COVID.
Disclaimer
This summary is based on a report by Fuzzy Panda Research. For the full, detailed analysis, please refer to the original source material: https://fuzzypandaresearch.com/stride-k12-esser-james-rhyu/
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