Whitney Tilson, a hedge fund manager with a strong interest in school issues, had this message for investors recently: Don’t bet on the for-profit, online education provider K12, Inc.
In a presentation last week at the Value Investing Congress, Tilson, who manages Kase Capital, offered a sweeping dissection of why he believes the publicly traded company is overvalued.
His title: “An Analysis of K12 and Why it Is My Largest Short Position.”
In one sense, it would seem counterintuitive to bet against K12, as Tilson acknowledges. The Herndon, Va.-based company has a presence in more than 30 states, its revenues have steadily grown, demand for an array of virtual options from parents appears to be strong, and the company has many allies in statehouses who say online education is an important school-choice option.
But Tilson’s critique focuses on the scrutiny the company has faced on a variety of fronts, and predicts it will exact a toll. Tilson says the company’s academic results have been lackluster by too many measures, and he cites the criticism the company has faced over its enrollment practices and the quality of its teaching staff, among other questions. Taken together, those problems will ultimately sap parents’ and policymakers’ confidence in K12, contends Tilson, who says the overall picture is of a company whose value is likely to drop over time.
“Like subprime lending and for-profit colleges, the business makes sense on a small scale, but, fueled by lax regulation and easy government money, the sector has run amok,” writes Tilson, who provided a copy of his lengthy presentation to Education Week.
Tilson was a founding member of Teach for America, has been involved in a number of charities focused on education issues, and has served on the board of a KIPP charter school, according to a recent bio. He says he supports online education when appropriate, and backs charter schools, including for-profit ones. He just doesn’t see K12 producing strong results.
A spokesman for K12, Jeff Kwitowski, said the company would refrain from commenting in detail on Tilson’s views. “K12 is focused on our students, teachers, and school partners,” Kwitowski said in a statement. “Serving their needs is our priority.”
In the past, K12 has defended its practice and performance on several fronts. Company officials have said that many of their schools serve students who arrive after having struggled in traditional academic settings.
It settled a lawsuit earlier this year filed by investors who claimed the company boosted its stock price by exaggerating its claims of academic performance. K12 disputed many of the core claims made by the plaintiffs. A company executive said at that time that “the claims in this lawsuit regarding our academic standards, student-teacher ratios, grading and attendance policies–allegations unfairly echoed in the media and other forums–could not be supported on the merits.”
K12 also disputed allegations from a Florida district that it used out-of-field teachers in classes, and provided students with little interaction with educators. The company said those claims were outdated, and that it had acted to correct the problems identified in some circumstances, while it described others as false or unproven.
Investors will ultimately have to decide whose evaluation they buy more—Tilson’s or K12’s.