Over the last six months, Strategic Education’s shares have sunk to $81.08, producing a disappointing 11.4% loss - a stark contrast to the S&P 500’s 6.9% gain. This might have investors contemplating their next move.

Is there a buying opportunity in Strategic Education, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Strategic Education Will Underperform?

Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why you should be careful with STRA and a stock we'd rather own.

1. Weak Growth in Domestic Students Points to Soft Demand

Revenue growth can be broken down into changes in price and volume (for companies like Strategic Education, our preferred volume metric is domestic students). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Strategic Education’s domestic students came in at 87,854 in the latest quarter, and over the last two years, averaged 6.4% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Strategic Education, its EPS declined by 7.5% annually over the last five years while its revenue grew by 4%. This tells us the company became less profitable on a per-share basis as it expanded.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Strategic Education historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3.7%, lower than the typical cost of capital (how much it costs to raise money) for consumer discretionary companies.

Final Judgment

Strategic Education falls short of our quality standards. Following the recent decline, the stock trades at 14.2× forward P/E (or $81.08 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better investments elsewhere. We’d suggest looking at the most entrenched endpoint security platform on the market.

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