Stride Inc (LRN), our K-12 virtual education business, is making progress in upgrading its technology stack after previous issues affected enrollment and user experience. Despite losing a school in Texas, historical trends suggest that most affected students tend to re-enroll in other Stride schools, mitigating the impact. The market often overreacts to such risks, leading to a lower valuation. Stride trades at a single-digit multiple of cash flow while providing recession-resilient services to a growing customer base. With a significant buyback program in place, I am optimistic that if the company resolves its technology challenges, it will return to growth and see a rapid re-rating of its shares.

Stride shares pulled back in mid-June following the loss of the Lone Star Online Academy contract in Texas, which was not renewed by the Roscoe Independent School District. This represented an impact of roughly 5% of the company's projected total enrollment for the period. While this development created near-term volatility, we note that in past similar contract losses, a meaningful portion of students often migrated to other Stride-powered programs.

Stride Inc. is the largest operator of virtual schools for grades K-12 in the U.S., serving over 240,000 students across 30 states. The company has been growing at mid to low teens percent and is currently valued below 7.5x EBIT, which suggests the market doubts its ability to fix recent software issues. However, I believe that with time, these problems will be resolved, and early indications show progress. As the company addresses these issues, I expect shares to re-rate closer to their previous levels, driven by strong demand for virtual education.

Stride Inc. is a direct beneficiary of the secular shift toward online and hybrid education models. The company operates a high-margin, recurring revenue business with consistent enrollment growth. Additionally, it has significantly underappreciated optionality in its adult learning and career prep divisions, which positions it well for future growth as the education landscape evolves.