A Slow Motion Implosion At K12 Inc.

K12 Inc., the for profit, publicly traded online charter school corporation, has been going through some rough times lately, and it looks like times are going to get even rougher. Let’s forget about the achievement of K12 Inc. students (generally lousy), the schools’ “churn rate” (about a third of its students leave every year) and the corporation’s student recruitment practices (despicable and deceptive). Let’s concentrate on what’s really important: stock prices. After all, this is a company that trades on the New York Stock Exchange. It answers to its stockholders more than it answers to its students or their parents. The bottom line for K12 Inc. is the bottom line.

In September, 2013, stock prices were at $38 dollars a share. A month later, in October, the stock plummeted to $18 in a single day. Since then, it’s been limping along but gradually gaining ground. This July, the price was fluctuating between $20 to $25. Then in one day, Aug. 14, the price dropped to $19.42. As I write this post Wednesday morning, the price is $17.39.

K12 Inc. is a good-sized corporation with schools all over the country (its Arizona Virtual Academy has more than 4,000 students) and a CEO who makes $5 million dollars a year. Arizona’s own Craig Barrett—ex-CEO of Intel and Gov. Brewer’s right hand education man—sits on the board (though he doesn’t talk about it much, preferring to brag about his relationship with BASIS schools). It’s the largest purveyor of online education for K-12 students in the country. If it topples, that’s going to be big news.

Why has the stock tumbled? For one thing, the corporation lied to its stockholders, claiming its students were doing better academically they were, which, as you might guess, shook stockholder confidence. But even more important than poor student achievement is this: K12 Inc. is beginning to lose some of its schools. For a grow-or-die corporation, that’s a potential death knell.

K12 Inc.’s biggest school, Agora Cyber Charter in Pennsylvania, is looking to cut ties with K12 Inc. And it’s not alone. Other examples:

• Last year’s loss of a management contract at Colorado Virtual Academies (COVA)—that state’s largest cyber charter—for the 2014 school year after complaints by parents and COVA about the company’s mismanagement of resources and misplaced priorities.

• Last month’s order by Tennessee’s education commissioner for the closure of K12′s affiliate there, Tennessee Virtual Academy, at the end of the 2014-15 school year, citing its dramatically poor academic performance.

• This spring’s formal opinion by New Mexico’s Attorney General that a Farmington, NM-based K12 affiliate is in violation of a state law forbidding a for-profit company’s involvement in managing a charter school.

• April’s decision by the National Collegiate Athletic Association (NCAA) that it would no longer accept coursework from 24 virtual charters that use K12 to provide their online curriculum, including both Agora Cyber Charter and California’s largest online charter network, the California Virtual Academy (CAVA).

A year ago, Whitney Tilson, a hedge-fund manager, put together a devastating PowerPoint put-down of K12 Inc. He wrote:

“K12 reminds me of the subprime mortgage lenders and for-profit colleges when they were flying high — and the ending will be similar I believe.”

And the thing is, Tilson is an advocate of the “education reform/privatization” movement, so he isn’t against the concept of for-profit charter schools or online education. He just thinks K12 Inc. is a failing corporation delivering lousy education to its students. It looks like an increasing number of buyers, who are turning into sellers, agree. So do a number of stock analysts who are saying in unison, don’t buy. Hold or sell.

This article appears in Sep 4-10, 2014.