Is LRN's Margin Expansion Story Strong Enough to Overlook Stagnant Per-Pupil Revenue?

Stride Inc. (LRN) is walking a tightrope between impressive operational efficiency gains and concerning fundamental headwinds. The education services provider just posted fiscal Q1 2026 results showing a flat board of revenue per enrollment at approximately $9,677 year-over-year, yet somehow managed to expand profitability meaningfully. This paradox deserves closer examination.

The Margin Expansion Narrative

The numbers tell an interesting story. Adjusted operating margin climbed 250 basis points to 13.1% while adjusted EBITDA margin reached 17.5%, up 230 bps. Adjusted EPS grew from $1.09 to $1.52, demonstrating real operating leverage in action. How did Stride achieve this without revenue-per-pupil growth? Answer: ruthless cost discipline and enrollment expansion.

SG&A expenses as a percentage of revenue fell 270 bps year-over-year in Q1, driven by declining bad debt and improved top-line leverage. Management expects this metric to continue shrinking throughout fiscal 2026, which suggests the margin expansion isn’t a one-quarter anomaly but rather a structural shift in how the company operates.

The Uncomfortable Truth: Revenue Per Pupil Going Nowhere

Here’s where the story gets murky. Management explicitly guided that revenue per enrollment would exit fiscal 2026 roughly flat—likely staying around that $9,677 mark. Multiple factors explain this stagnation: state funding mix variations, timing effects, and an absence of the enrollment catch-ups seen in prior years.

The more troubling catalyst: platform implementation issues have triggered higher student withdrawals and capped new enrollment growth. Stride now expects 10,000-15,000 fewer enrollments in fiscal 2026 due to these technical glitches. This isn’t trivial—it represents a material headwind that’s partially masked by margin metrics.

Competitive Positioning Under Pressure

In the education services space, Stride faces intense competition. Strategic Education Inc. (STRA) and American Public Education Inc. (APEI) both operate in overlapping K-12 and career learning markets. Over the past month, Stride shares gained 6.3%, slightly outpacing STRA’s 3.3% but trailing APEI’s 6.5%, suggesting the market views all three similarly right now.

Valuation tells a different story. Stride trades at a forward 12-month P/E of just 7.64, significantly cheaper than STRA (12.47) and APEI (16.95). This deep discount raises a critical question: are investors undervaluing Stride’s margin expansion, or are they correctly pricing in the risks of flat-to-negative per-pupil revenue dynamics?

The Investment Case: Will Margins Alone Carry the Stock?

For near-term shareholders, Stride’s story hinges entirely on whether margin gains can offset fundamental weakness in per-pupil revenue. Analysts have raised earnings estimates for both fiscal 2026 and 2027 (up 3.1% and 8.6% respectively), suggesting confidence that operational efficiency matters more than enrollment-driven pricing power.

The critical juncture arrives when the platform issues get resolved. If technical problems are contained and enrollment quality stabilizes, Stride’s focused approach on margin expansion could prove sustainable. However, if the flat board of per-pupil revenue persists beyond fiscal 2026, investors may eventually demand better top-line growth to justify further valuation expansion.

The margin story is genuinely compelling right now, but it’s ultimately just a temporary band-aid if per-pupil revenue remains structurally challenged. Watch for signs of platform stabilization and enrollment quality improvement in coming quarters.