Over the past six months, Strategic Education’s stock price fell to $94.99. Shareholders have lost 12.3% of their capital, which is disappointing considering the S&P 500 has climbed by 4.7%. This may have investors wondering how to approach the situation.

Is now the time to buy Strategic Education, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Even though the stock has become cheaper, we're swiping left on Strategic Education for now. Here are three reasons why you should be careful with STRA and a stock we'd rather own.

Why Do We Think Strategic Education Will Underperform?

Formed through the merger of Strayer Education and Capella Education in 2018, Strategic Education (NASDAQ:STRA) is a career-focused higher education provider.

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 86,533 in the latest quarter, and over the last two years, averaged 6.2% 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. Cash Flow Margin Set to Decline

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the next year, analysts predict Strategic Education’s cash conversion will slightly fall. Their consensus estimates imply its free cash flow margin of 11.7% for the last 12 months will decrease to 9.8%.

3. Previous Growth Initiatives Haven’t Paid Off Yet

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 4.1%, lower than the typical cost of capital (how much it costs to raise money) for consumer discretionary companies.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of Strategic Education, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 17.6× forward price-to-earnings (or $94.99 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. Let us point you toward Cloudflare, one of our top software picks that could be a home run with edge computing.

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