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Stock Traders Reap Billions with Stampede Into Online Learning

Originally Published by: bloomberg.com – August 6th, 2020

Many families have found they hate remote learning for their grade-school kids. But a whole other group just loves it: investors in online-education companies.

Shares of Chegg Inc., a Silicon Valley company specializing in homework help, have soared more than 120% this year. K12 Inc., which operates online public schools, has doubled. Boxlight Corp., a Georgia company that sells classroom and teacher-training software to schools, is up 203% since April.

But some skeptics worry the enthusiasm may be getting out of hand. They say the shares of some of the publicly traded companies have become darlings of day-trading novices on Robinhood Markets Inc. If a coronavirus vaccine is developed and kids go back on-site, it’s unclear if parents will stick with their virtual or home-learning substitutes.

“The question for a lot of these businesses is: Is this a one- to two-year bump and then does it settle back down, or is it sustainable?” said Adam Newman, co-founder and managing director at Tyton Partners, an education-focused investment banking and consulting firm. “People are exploring alternative models right now in part because of the virus. My question is, ‘Will they stay with the models after the virus disappears?’”

Parents who rely on these products may also be disappointed. Few rigorous academic studies have been conducted to show the effectiveness of online courses for students younger than college age. Research has generally found that less prepared students, including those from lower-income families, struggle to complete courses.

That hasn’t stopped investors large and small from piling in, particularly as more school districts across the country opt to start the academic year with all-virtual classes. This year, Lind Partners, a firm focused on smaller, fast-growing companies, made a $750,000 follow-on investment in Boxlight. In late July, the company announced another round of stock for sale.

Boxlight Chief Executive Officer Michael Pope describes “tremendous interest” in the offering. He notes demand for teacher training as many districts focus on improving distance learning. Pope also sees potential in the coronavirus proposal from Senate Republicans that includes $70 billion for K-12 schools. “There’s going to be a tremendous about of money for school districts to allocate,” he said.

Some companies position themselves as enhancements to traditional schools. Chegg caters to families and college students, offering personal tutors, as well as textbooks and create-your-own flashcards. Boxlight sells course software and 3D printers to schools.

Profit Motive
K12 offers itself up as a potential replacement. It manages fully online charter schools — or public schools managed by outside operators. The company plans to hire 1,300 educators for the fall. It currently works with about 6,000 nationwide. In February and March, 100,000 parents inquired about enrollment at K12 — a 57% increase over the same time last year.

Gary Miron, a professor at Western Michigan University who studied private companies that manage public schools, says K12’s online offerings have been criticized for large class sizes, low test scores and high dropout rates. Analysts expect its revenue to grow 8.5% in the current fiscal year, to $1.12 billion, and net income to rise too.

“It’s a corporate model,” Miron said. “It’s based on profit. It’s not so much as focused on serving the students as getting more in the door.”

K12’s James Rhyu said it’s “misguided” to measure its online schools solely on student performance.

‘Isn’t for Everybody’
“Online learning isn’t for everybody,” said Rhyu, K12’s president of corporate strategy, marketing and technology. He added those who focus on academic scores often “lose sight” of the broader needs of parents and students who chose remote learning.

Rhyu also said K12 has been in talks with some states and some of the country’s largest school districts about its services.

Wall Street’s interest remains strong. Last month, BMO Capital Markets analyst Jeff Silber raised his price target for K12 to $52, a big bump from his prior $32 level. The recent run-up has the company’s shares already closing in on that target. They currently trade at $51.60, up 154% on the year. “We haven’t seen demand this strong if ever,” he said.

Private equity firms have invested $2.18 billion in education technology firms this year through the second quarter, versus $585 million for all of last year, according to Pitchbook. The largest deal in 2020 to date was the leveraged buyout of education software provider Instructure Inc. by Thoma Bravo LLC in late March.

In Control
Sylvan Learning, the Hunt Valley, Maryland-based tutoring company owned by funds affiliated with Guggenheim Capital Partners, has received inquiries from others who would like to buy the company, according to CEO John McAuliffe. He declined because of opportunities in shutdown-related growth. “Parents are going to want their children not to fall behind,” he says.

John Edelson, founder of Time4Learning, says he’s seen a “tidal wave” of interest from families fleeing the uncertainty of school reopenings in the pandemic. His company sells online curricula to homeschooling families. It’s part of VKidz Holdings, backed by private equity firm Veritas Capital.

“It’s astonishing how widespread and common parent concerns are,” Edelson said. “If you look at the fall, there’s nothing but fear and anxiety. What many parents realize is that once they decide to homeschool, they’re in control.”

One of his many potential customers is 42-year-old Keisha Mathew in Chicago. She isn’t planning to send her children, ages 5 and 7, to on-site schools this fall in the city’s West Ridge neighborhood. While she’s keeping them enrolled, she’s also willing to pay for additional learning services, or even a private teacher.

“We have paid tutors in the past for language classes when our daughter was very young,” said Mathew. “We are both in education and have high-speed Internet service, so we have the resources to be successful at homeschooling. Now, will we be happy? Not always. Will we be healthy? Absolutely.”

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