Stride Hit with Securities Fraud Suit After 50% Stock Crash on Enrollment Shortfall

What happened

Stride's stock plunged 50% in late 2025 after the company announced low enrollments, sparking a securities class action lawsuit alleging fraud by senior executives. This sharp decline starkly contradicts the robust fundamentals highlighted in the DeepValue report, which showed FY25 revenue of $2.4bn, net income of $288m, and a net-cash balance sheet. The report had already flagged enrollment and policy risks as critical vulnerabilities, noting that multi-year declines could erode earnings, and this event suggests those risks are materializing. The lawsuit adds a layer of legal and reputational overhang, potentially exacerbating the 'stigma discount' from past controversies in for-profit virtual education. Despite trading at a deep valuation discount of ~8.8x P/E with a DCF estimate near $122, the immediate crisis undermines investor confidence in management's guidance and the reliability of state funding-dependent revenues.

Implication

The enrollment miss and ensuing lawsuit directly challenge Stride's growth narrative, casting doubt on management's ability to forecast and execute amid volatile state funding environments. Legal proceedings could drain resources, distract leadership, and lead to settlements or penalties, further pressuring the already depressed stock price. While the net-cash balance sheet offers some downside protection, the core K-12 franchise's durability is now under scrutiny, with potential for contract losses or regulatory backlash if fraud claims gain traction. Investors should monitor enrollment trends and legal developments closely, as a resolution in favor of the company could present a buying opportunity, but prolonged uncertainty warrants a risk-off stance. The DeepValue report's 'POTENTIAL BUY' rating is now under severe stress, suggesting a shift toward 'HOLD' or 'SELL' until clarity emerges on both operational recovery and legal outcomes.

Thesis delta

The previous thesis centered on a valuation disconnect tempered by binary policy risk, but the enrollment collapse and fraud lawsuit have activated key downside triggers, notably multi-year enrollment declines and reputational damage. This shifts the investment case from a cautious opportunity to a high-risk situation where legal overhang and management credibility issues overshadow fundamental strengths. Until Stride demonstrates enrollment stabilization and provides transparency on the lawsuit, the risk-reward profile has deteriorated, warranting a more defensive stance.