K12, Inc ., a for-profit virtual education company looking to open a statewide virtual school in North Carolina, took a fairly major hit yesterday on Wall Street when a stocks analyst downgraded the company’s performance outlook.
A Wells Fargo analyst took the stock from a favorable “outperform” stock rating Monday to a more neutral rating of “market performance” based on ongoing questions being brought up about the quality of education it offers at Colorado Virtual Academy, according to KUNC , a public radio station in Colorado.
The company (NYSE: LRN ) has the largest reach of for-profit online providers in the country, and runs virtual public schools in 29 states. Students from kindergarten to 12th grade can take their entire school curriculum from their home computer, at the expense of public taxpayers.
The Colorado online school had a graduation rate of just 12 percent in 2010. To compare, North Carolina’s statewide graduation rate topped 80 percent for the first time last year, a number that political leaders of all stripes say is still too low.
K12, Inc. is also facing questions in Florida, where the state education department is investigating the company to see it used non-certified teachers to teach classes and then lied about it.
Here’s the explanation about yesterday’s stock downgrade by Wells Fargo, posted by the Colorado NPR station .
We are lowering our rating on LRN shares to Market Perform over performance issues that have come to our attention at one of the company’s longest-standing schools, Colorado Virtual Academy (COVA), which enrolls approximately 4,500 students and generates, we est, around $23MM in annual revenue (~3%) at an above average margin. We believe this latest example of K12’s declining academic performance could weigh on shares at least until the problem seems addressed or new school growth meaningfully accelerates.
The market responded quickly to Wells Fargo downgrade, and K12’s stock dropped by close to $4 a share yesterday, ending the day at $16.61.
The company issued a statement  Monday in response to the stock freefall, attributing the academic problems in Colorado to a big influx of at-risk students.
It also spun it this way – the low graduation rates and academic performance at the Colorado virtual school were signs that the most vulnerable in education were flocking to the computer-based education options.
From the K12 statement:
It is worth noting that the continued demand for COVA’s offerings by the parents of academically at-risk children is a clear recognition of COVA’s and K12’s leadership in addressing the difficult challenges of this vulnerable student population.
The company has been trying hard to break into the North Carolina’s public school system as well.
K12, through a non-profit group called N.C. Learns that was formed and funded by the company, applied in the spring of 2012 to open up a statewide virtual charter school by first getting a blessing from the Cabarrus County School Board. The Cabarrus schools were promised an annual “administrative fee” in exchange for agreeing to lend its support to K12.
The N.C. State Board of Education declined to act on the application, and N.C. Learns (the K12-backed non-profit) has since appealed to the N.C. State Board of Appeals after a Wake Superior Court judge sided with state educators.
The appellate court will likely hear the case sometime next year.