$ELAL：El Al 是一家按2x EBITDA交易的战时垄断企业，这是陷阱吗？| ASB Partners

Today we've got a great one. We've got Adam Buckstein from ASP Partners on the podcast. This is his second time on. The first time he was on, we talked about Stride, ticker LRN, and we're going to end this podcast with a 10- or 15-minute discussion on Stride.

The number of value investors—focused, concentrated value investors—who sent inbound messages asking questions and wanting me to connect them with Adam on the heels of that podcast was awesome. I think that really speaks to the quality of Adam's work and his interesting thought process. He's got another one for us today: El Al. I hope I said that right. It's basically the Israeli national airline.

He's got a thesis involving downside protection, lots of assets, an interesting pricing structure, interesting competitive dynamics, and all that type of stuff. He has a full write-up on his Substack, and I'll include a link to it in the show notes if you want to check it out.

But we're going to get to the full LL pitch in one second, but first word from our sponsors. Today's podcast is sponsored by fiscal.ai. Fiscal.ai is the modern financial data provider for global equities. Look, that's what they have me tell you, but let me tell you how I've been using fiscal.ai. And I'll remind you I'm a customer. I paid with my own money to connect to the fiscal.ai API. There's two things that I've really found it useful for. Number one, this is something super unique. They've got a huge database of fund letters. And the fund letters are create are connected by the API. So whenever I'm researching a company, whether it's researching the company because I'm interested in them or looking at an event or prepping for a podcast, the first thing I have my AI do is I say, "Hey, I'm prepping for a podcast on What are we I'm prepping for a podcast on Hims." Go to And the first thing he does is it says, "Hey, here's all the recent letters on fiscal.ai of people talking about Hims and here's their thesis, here's their birth thesis, all that sort of stuff." So that's the first thing and that is really unique and that is really fun. And then the second thing I do is I use it for edited financials, right? I've got my model and I say, "Hey, I'm looking at Hims. Go build me a model." And it says, "Sure, I'll build you a model." And every line in that model has a link so I can see, "Oh, they're pulling this EBITDA number. They're pulling this segment number. They're pulling this number from 3 years ago." I click on it and takes me right to fiscal.ai and it says, "Hey, here's these company-specific KPIs. Here's these ratios." And I can see exactly where they're getting it and exactly where they're getting it from. So, it is a super reliable data provider that can connect to your AI. I found it super helpful. I'm a big fan of the podcast. If you want to try it out, you can use my link at fiscal.ai/ YAV to get 15% off their AI connector. That's fiscal.ai/YAV and there'll be a link in the show notes.

With me today, I'm happy to have Adam Buckstein from ASP Partners on for the second time. Adam, how's it going?

Doing good. As you said, I'm excited for today's podcast, but I'm always excited. We'll get there in 1 second.

Just a disclaimer: nothing on this podcast is investing advice. That's always true, and maybe it's particularly true today because we're discussing an international stock. People should remember that there are extra risks and tax consequences. We're not tax advisors, and we're not giving any investing advice. There's a full disclaimer at the end of the podcast and in the show notes.

Adam, I think at the end of this podcast, we might do a quick little update on Stride, ticker LRN, which was the first podcast we did that people actually responded to with rave reviews. I got lots of calls from some pretty big funds who said, “Hey, this is super interesting,” and I think I put you in touch with a few of them.

Before we get to that, the company we want to talk about today is El Al. This is the Israeli airline in my head, but I'll stop rambling and turn it over to you. What is El Al, and why are they so interesting? You can tell me if I'm saying it wrong as well.

El Al was good enough. It's a little hard to get the exact pronunciation, but you're fine. El Al is the Israeli flag carrier. It was started in 1948, when they founded the country, and then it was privatized in the last 20 years.

The story, to cut to the chase, is that since October 7, 2023, there's been almost continuous disruption in their market. The main airport in Tel Aviv is called Ben Gurion. Because of multiple wars on multiple fronts, there was actually a missile that hit Ben Gurion last year, and El Al has found itself in basically a monopoly position on the transatlantic flight market.

There have been carriers from Europe flying on and off, but you basically have a situation where they've been able to command this leading market share. They've also delevered the balance sheet. We're still in the midst of a war, and it trades really cheaply on an absolute and relative basis.

I think it's a very high-quality asset, the type of thing that's going to be around 30 years from now. The market is scared out of its mind, but I feel like it's a very asymmetric setup because of the quality of the balance sheet and the current setup that we find ourselves in. I'd love to walk you through the story.

Perfect. Before you do that, I should note that you have a really nice write-up. I actually thought the best piece of the write-up was the conclusion. You have this killer paragraph in the conclusion, which I can quote later, but I'll include a link to the write-up in the show notes so people can see the full write-up if they don't want to listen to us ramble for an hour.

That's a great overview. I've obviously got some pushbacks and some thoughts there, but I guess we can start. I do like to start with this question: what are you seeing that the market is missing that makes this a risk-adjusted opportunity?

A few things. Number 1, to start with the obvious, the stock is pretty underfollowed. It happens to be that only half of it is publicly traded. During the middle of COVID, there was an equity recapitalization. The Israeli government really did not bail the airline out. They provided some loans, but a U.S. investor came in and essentially bought half the company between warrants and shares.

Although the warrants are now fully converted, we're looking at a fully diluted market cap right now. There are 592 million shares outstanding. We'll go through the slightly confusing terms of the shekel versus the dollar, and I'll walk through that.

It truly is underfollowed and underappreciated. If you look at the front page, there are basically no U.S. hedge funds. The top holders are all Israeli insurance companies. As you keep going, you see that they're deleveraging something that's on the balance sheet. We say that it hasn't been appreciated, but I really think that in this situation, the deleveraging is so unprecedented and so significant because they've been able to have 3 years of windfall profits.

They've totally delevered the balance sheet, and now they're very overcapitalized. They're returning capital to shareholders, and that's a unique setup. This is a tough business. As Bob Crandall, the former CEO of American Airlines, said, “This is a rotten, nasty business.”

We're talking about an airline in the middle of a war, with jet fuel spiking—it was up 86% last quarter—and El Al still managed to generate a lot of free cash flow. That's part of the story here: they've already proven that they're profitable even when the commodity is going against them.

That's number 1. In terms of the deleveraging, that speaks to the valuation. It trades at 2.3 times EV to EBITDA and generated a lot of free cash flow. There's just an absolute cheapness and a deleveraged balance sheet, so you're not worried about any balance-sheet issues.

Number 2, I think the market doesn't appreciate that inbound traffic at Ben Gurion is being completely transformed after 3 years of war. We're still in the midst of the conflict with Iran.

The most important change has been permanent. I'm not saying it won't change—there will be other carriers that come in—but Turkish Airlines and Pegasus, which were top-5 carriers, totally left the market. They're not coming back.

Even Ryanair, which is your worst nightmare—Michael O'Leary has said, even though he's kind of provocative, “I'm not coming back even when the missiles stop flying”—because they basically took away his slots at Terminal 1, which has cheaper landing rights. He'll probably come back, but he's probably just talking.

Right now, I still think the market has been permanently transformed. That's on the supply side. On the demand side, El Al has won the trust.

They're the only ones that have been able to consistently fly. There's been this on-again, off-again situation for literally 3 years. I don't want to use the word “flywheel.” I don't want to overstate it for an airline because it's a commodity; they're all flying the same planes. But at the end of the day, there is some lock-in with the loyalty program and people who just want certainty that their tickets aren't going to be canceled, which has happened.

It's happened to friends, and it almost happened to me. I was there in May. People are going to want to fly El Al, and that speaks to the pricing power and the inelastic demand that they enjoy in their unique niche. So, I'd point to those 3 things.

That's fantastic. You really set this up for me as a podcast because those are a lot of the things I wanted to talk about. Let's start with the deleveraging, because I think you mentioned this, and I think this will play into the balance sheet and valuation stuff as well. You mentioned that over the past few years, the company has ridden wartime profits to really deleverage the balance sheet. They've gone from a net debt position to a huge net cash position.

I guess I have 2 separate thoughts on that. Number 1, I remember after the Russia-Ukraine war started, a lot of companies—whether it was energy, steel, or a lot of these other businesses—were making record profits. Even today, you could apply it to the Microns of the world in the memory components, though I think that's a different level of record profits. I would look at them and say, “Hey, I think the market's missing how good the balance sheets are, right?” These guys have always run with 2× leverage, and now they're running with 1× net cash.

What ended up happening was, “Yeah, but they were doing it because of wartime profits, and when the profits fell out, they just had these huge cash pools sitting around.” None of the stocks have really worked that well, to my mind. U.S. Steel got taken out, so that kind of worked for them, but all the steel players—Cleveland-Cliffs, the one up in Canada—none of them really worked.

I guess my first thought would be, “Hey, they kind of delevered through supernormal profits, and we can get to profits later, but does that really work?” That would go to the second thing I'd say: They've got this big net cash position, but a lot of it is from customer float, right? Customer prepayments.

They're not canceling flights, but you mentioned it: The Israeli government didn't bail them out during COVID. Go ask all the airlines how they feel about relying on a balance sheet made up of customer float when the customers might cancel. Here, they might cancel because COVID happens, the war breaks out even further and nobody wants to travel, or they can't travel safely and the airline can't launch flights safely.

So, I look at this balance sheet and say, “Hey, I see 2 errors that companies I've looked at have made in the past, and this balance sheet kind of rests on them.” That's not to say it's going to go bankrupt, but if we're relying on that for the valuation, could that prove to be a problem?

Yeah, so let's talk about the balance sheet. The way they talk about it, they have over $2 billion in available funds for liquidity. About $1.3 billion of that is called air traffic liability, which is basically an interest-free loan from their customers because people buy tickets in advance.

Even excluding that and assuming it normalizes—and it will someday, but they've been enjoying this float for the last 3 years—they still have a significant net cash position on their balance sheet. So, that's number 1.

Number 2 is that it's a real asset. It's pretty extraordinary. I was looking at their second-quarter results, and in the income statement they had, I think, $31 million in net finance income. It was positive, whereas the second quarter last year was negative $4 million. That's a $35 million shift just in the financing line.

Part of that is that they've been able to buy out 9 aircraft since 2025. They basically bought them out of their leases, and that's much better longer term. I would point to the things that are permanent. Assuming the air traffic liability normalizes, fine—they're still going to have a cash balance. They're still going to own 80% of their fleet. 2 years ago, they owned only 50% of the fleet.

The most important thing, though, is that I think about this all the time. You're right: This screams that the company is over-earning. How could you not be concerned that it's going to mean-revert and the stock isn't going to work because of that? I think I would point back to their last clean year, which was really sandwiched between COVID and the war on October 7, 2023.

In 2023, they were profitable after CapEx, after leases, and after amortization of loans, to the tune of $100 million to $200 million in free cash flow. I look at it like this: Worst-case scenario, let's say they go back to that. You're looking at a $2 billion EV and normalized free cash flow of at least $150 million to $200 million. I feel like I'm willing to take that bet.

I don't think that's going to be the low end because they've permanently added a lot of capacity. It's not clear how much capacity they've added because some of it is through wet leases. Those are temporary leases, but they're the minority of it. The majority is that they've just added to their fleet.

Perfect. Let's turn to valuation a little bit more. Your write-up—the killer line, and people should go read the write-up—is at the end. The downside here is supported by the $1.3 billion of net cash that we talked about. They own a lot of their planes, and you can go look at plane prices. Owning planes matters because all these planes are in the money.

You say, “Hey, they own more than $1 billion of planes, and they've got an external valuation on their branded credit card and loyalty program that's worth $700 million-ish.” So, that's $3.5 billion in hard-asset value versus an EV of, depending on how you treat the cash, roughly $2 billion. You're buying it at a substantial discount.

I want to talk about that in terms of how you also compare it to a bunch of airlines—JetBlue, United, Delta, all these guys that trade at around 5× to 6× EBITDA, while these guys are trading at 2×. How do you think about the valuation there?

I'm a journalist, not an airline expert. The right way to do the valuation is probably to segment across the percentage of the fleet that's owned, but directionally, the more planes you own in this environment, given how expensive leasing is, the higher your multiple should be. The better the balance sheet, the better as well.

I see a lot of things that indicate to me that they should at least trade with the rest of the group and not at a discount. Obviously, there's a huge geopolitical risk factor, but as crazy as it sounds, they've proven that they can fly under all circumstances, and they have an implicit backstop from the government.

When things got really intense, the government stepped in and basically said they would insure the planes when the private commercial insurers stepped out. I don't want to overthink it, but I think they deserve at least to trade in line with their peers, which would be a really nice return from here.

The question is obviously at what multiple of normalized earnings, but that's the guesswork. There's been a permanent increase in their capacity, and I think the big X factor now is jet fuel. That's masking some of the improvement in their underlying earnings power, but once things normalize, you're going to see a business that's generating a lot more free cash flow, and it should trade in line with its peers.

No, and it's interesting because airlines—one of the questions I have in my head is, everybody, every value investor, hears “airlines” and thinks of Warren Buffett's 1990 call to 1-800-Airlineaholic or whatever, right?

But the interesting thing here is that, because it's an Israeli airline, there are limited slots. To me, it's got a lot of the New York City components to it. In airlines—and I remember this from the Spirit-JetBlue trial—yes, airlines are super, super competitive across the domestic board, but there are limited spots in New York City.

Those spots are really valuable because there is a lot of demand coming in, and with limited supply, those spots are hugely valuable and hugely profitable. I look at Israel and think you could imagine a lot of the same dynamics with the Tel Aviv airport.

There are limited spots, a lot of international demand, and guess what? Everybody left. So these guys took, I think, like 50% of the spots in Tel Aviv. Again, you can correct me if I’m directionally wrong, but they put on a lot of supply while taking out a lot of the best supply, and they own it. There’s no way for anyone else to come in unless they build a new terminal or something.

So you’ve got a really interesting setup there. You can tell me if I’m misthinking about any piece of that.

Yeah, that’s the right way to look at it. I forgot the guy—he was the one who deregulated airlines under Carter—and he said, “Airlines are like marginal cost with wings.” So when your marginal-cost competitor leaves the market, it’s obviously much better for pricing.

I think Delta and United wanted to come back 2 years ago. It’s literally been on again, off again for years. They’re supposed to slowly come back in Q4, and they will eventually come back. That’s how you have to underwrite this: there’s going to be full competition someday, full stop.

Now, who knows how long this war goes on? I was listening to someone the other day who said that in every war that’s been started, the troops are going to be home by Christmas. It’s the nature of these things that they go on longer than people expect. So we’re 6 months into this Iran conflict. Who knows, right?

I kind of look at it like I would be long this just on normalized earnings, whatever those are. I think right now the setup is that you have at least 2 more quarters of just gushing windfall profits, which further buy down your enterprise value. You’re buying the number one, and everyone wants to own the number one in a market. This is the undisputed number one. It has these great brands, and that kind of got me over the hump to own an airline, as much as it’s—

I’ll contact my buddy Warren and have him get you a membership in the anonymous thing. Maybe he’ll be your sponsor. Who knows.

Let me go to what you mentioned about the profits. They’re kind of making windfall profits right now because it’s wartime, everybody else leaves, and they get the slots. I think people might look at the windfall profits in 2 ways. One, the state of Israel obviously has a lot of say here, right? They were kind of required to run, and I believe part of their operating agreement says the state of Israel can require them to run in extreme emergencies and can require them to staff no matter what.

So I think there are 2 sides to that. One, people worry, “Hey, these guys are going to be required to run uneconomically on the downside.” The counter is—and you can tell me if I’m wrong—I was familiar with the golden share, so I was just Googling around while I was preparing for this podcast. The golden share is where Israel owns a piece of some state-ish companies, which gives it blocking rights over mergers and things like that.

As I was Googling around, I saw that they got hit with a competition authority fine for $40 million for excessive and unfair pricing from October 2023 to May 2024. That makes me worry: “Hey, are you going to have the worst of both worlds?” If there’s no demand because of war or something, you’re going to be required to fly. But if there’s tons of demand, everybody’s coming out, and you try to increase your pricing to wartime pricing, they’re going to hit you with a fine.

On the downside, you have to have all the capacity operating, and on the upside, you get fined for the supernormal profit. How would you think about that? That’s just the general state-of-Israel risk, I suppose, but it’s also regulation risk and all of that type of stuff.

Yeah, you have to get comfortable with it. First of all, I think it’s scary to invest in a foreign country. There’s a different currency and a different government. I think Israel is relatively capitalistic and sane.

Going back to COVID, the fact that they did not bail out the airline—anything’s possible because it’s the government, but there is a recognition and understanding that they stepped into the lurch and bailed this thing out when it was losing tens of millions of dollars on a monthly basis. No one knew this was in the depths of COVID. So my take on it is that they respect property rights.

Of course, El Al is beholden to the government. That’s actually what happened in April this year. They had to fly at very reduced capacity because of government restrictions, just for safety reasons, and of course El Al did it. But that’s just the nature of the position they’re in.

One other quirk that I think is important is this: the big question with airlines is that they’re all flying the same planes, right? They’re all using the same airports. So you’re right, the slots are important. But even once you assume they already have the same slots, how do you actually differentiate yourself?

Of course, there are some things here and there, like bells and whistles in the cabin. But El Al has leading security. There’s no one else that does security like El Al does, for obvious reasons. Part of the way the security works is that the government mandates that they have this super security.

It’s very expensive. They have people in local markets and also in foreign markets who interrogate passengers. They’ll ask you random trivia about the Bible. They just try to mess with you to make sure you’re not a terrorist. That costs a lot of money, and the government imposes that on them by law.

This was probably missed, but last year they renegotiated that cost-sharing agreement, and the government basically shares the cost for that extra security. The point is that it’s more collaborative. It’s like a partnership. The government appreciates what they do, and they stepped in and provided a lot of capacity when everyone left the market.

So I’m not concerned about that risk. I mean, look, there’s a lawsuit, and it’s $40 million. It’s not nothing. But it’s not like a kangaroo court where they can’t have their day in court. It’s a pretty Western, capitalistic system where you’re going to be able to defend yourself.

Honestly, I’m just laughing because I’m having trouble. I went to Catholic high school, but I’m having trouble imagining if I got pulled out and they were like, “Hey, man, tell me about the Hebrew Bible.” I might not be able to answer, and they might suspect me of terrorism. They’d be like, “I don’t know, man.”

Let me go to a little bit more on valuation. You list several peers. I think Ryanair is kind of your only international peer in your deck, in your write-up. You’ve got United, Delta, and JetBlue.

I should have put Wizz Air in, probably. Wizz would have been better because it’s a low-cost carrier, but it’s kind of a basket case. They’re not making money, but they do play in the Tel Aviv market, or they used to. That was why I left it out.

Well, the one I was thinking of was Jet2 over in London, which is a favorite of a lot of value investors as well, right? But it trades really cheaply, and it’s completely different. They have an airline, but it’s more known for package bookings and that sort of stuff. It gets a lot of float, and the company owns a lot of the airplanes.

I actually pitched to a friend that we should go activist on them and force them to wrap up the whole business and just sell the aircraft because they were trading so far below the value of the aircraft they owned. But that company trades really cheaply.

So you’ve got this company trading at 2x EBITDA versus United Airlines at 6x. I guess my question would be: is a largely domestic U.S. player—a scaled U.S. player that gets a lot of profits from the loyalty program and the credit card points, which I know El Al does as well, but that pales in comparison to the might of the U.S. consumer—the right comp?

If I went to the second tier of airlines, I think you’d find a lot of them trading around this pricing.

Yeah, I hear that pushback. I think I’d just go back to what I said previously: there are a lot of characteristics in this setup that speak to the quality of the asset, the durability and opportunity, and the niche that they play in. That’s unique to them.

But I haven’t studied those other airlines.

That’s completely okay. Completely okay. At some point, 2x EBITDA is 2x EBITDA. But let me focus on the EBITDA number, because I think this is a more interesting question, and this is one that jumped out to me.

So, EBITDA obviously backs out depreciation and amortization. I've done a lot on aircraft and aircraft lessors. The most important thing for aircraft, airlines, and aircraft lessors is getting the plane going, right? The less time you can have it on the ground, the more time you can have it up in the air, because the plane is your big expense, and that depreciation is massive on the plane.

El Al follows Jewish holidays, right? They don't fly on the Sabbath, and they don't fly on major holidays. So that's roughly 12% to 15% of the year that they're not flying, if I'm doing 1/7 plus some holidays correctly in my head.

Yeah, I think that applies in 2 ways, right?

When they're buying aircraft and they go and buy a new Boeing airplane, Boeing's going to sell to the high bidder for the most part. El Al is competing against Thai Airways or Jet2, or whoever is going to run it 24/7, basically. El Al is going to run it in that math, 26 or something. So they're paying 24/7 pricing for something they're going to run 26.

So my first question would be: how can they make that economics work? And my second question is, if we're valuing it on EBITDA, but 15% of the time they have an unproductive asset, should we actually be haircutting them for that 15% of the time the assets are on the ground?

Yeah, it's a great question. I think this is interesting. I think this speaks to what's happened. They already had a large percentage of their planes that were owned, and then, like I said, since 2025 they've bought back 9 planes. They don't share exactly what they're underwriting to, but it seems very clear that leasing is not optimal, for the reasons that you've talked about.

I just think in general, leasing has gotten much more expensive. Your total cost of ownership when you lease a plane—you have to return the plane in a certain condition, right? You have to redo the engines and everything. You wouldn't do that if you owned it; you would probably, whatever it is, assuming it's safe, push out that scheduled maintenance. So I think they're probably responding. That's part of the reality of why they're buying their planes off-lease.

And I think that, again, that's of course true. You could cut EBITDA by 15%, but then I would just like to say, let's look at the last normal year. They were doing fine. 6 years ago seems so long ago, but post-COVID, it's hard to talk about pre-COVID because it was just a different business. It's new ownership, a different balance sheet, everything. But if you take it as it is, I can't envision a scenario where these guys wouldn't be profitable in their market.

No. And look, it cuts both ways, too, right? I would guess Israelis pay a premium for their travel because the airlines have to operate it over 6 days instead of 7 days effectively, right? And that does create a kind of unique moat around the business, especially operating inside the country, because if Delta wants to expand, all their systems are designed for, “Hey, we run this 7 days a week. When we're looking at airplanes, we can put it here for 6 days a week, or we can go fly it from Tampa to San Diego 7 days a week.”

So I do think it creates a unique market that might have some moat and some competitive advantage. The D&A line is what I worry about. Would I rather have $1 of EBITDA from these guys or $1 of EBITDA from Jet2, where the depreciation is kind of going to be 15% lower at Jet2 just because they run it 15% more? It's an interesting question that jumped out to me, and it's one I haven't really had to think about before, because across most businesses I look at, they all operate on the same hours, and this doesn't. So that's unique.

Yeah, it's a very unique setup.

Yeah. Let's see if there's anything else I've got. I think we've gone through most of my questions on Jet2—on El Al, actually. Anything else we should be talking about with El Al, or do you want to do a quick update on Stride?

No, that's good.

Cool. Let's talk about Stride. So you came on at the beginning of this year. Was it the beginning of this year? I can't even remember at this point, or was it the end of last year? One of the two.

Beginning of January, yeah.

But we did a really interesting podcast again. I might have gotten the most feedback on it. There are some fiery ones out there, but it was the podcast I got probably the most professional and balanced feedback from deep, concentrated-value investors who were interested in this company trading at—

Now, you guys can't help yourselves at 10 times earnings, you know.

Well, it's not just 10 times earnings. It's 10 times earnings growing quickly, with tailwinds, a moat, and very little capex. It had a lot going for it—

Recession-resistant, yeah. It has a lot going for it, yeah.

So there has been a lot that's happened over the past 7 to 8 months since then: a new CEO, earnings, an outage. The stock price has been recently flat since then. So I'd love to toss it over to you and do a quick update on Stride, if that makes sense to you.

Yeah, so the big news that you're talking about is that the CEO left abruptly, and then they pre-announced their Q4. Their fiscal year ends in June because they want their Q1 to line up with the school year. They get their count date, which is their enrollments. They want that to line up with their fiscal first quarter, and that basically predicts the revenue.

It's a very transparent business: they can see the revenue for the rest of the year because it's the count of students at the beginning of the school year, with the model accounting for some attrition and the students they gain. Basically, what happened is that the CEO left right before they pre-announced their Q4. His name is James Rhyu. He'd been the CEO for 5 or 6 years, and he'd been with the company for 13 years.

Under his watch, he had grown EPS from less than $1 a share to, I think, over $8 this year. So, fantastic results. Obviously, there was a huge COVID bump in the middle of that, but they've totally grown through the COVID cohorts and kind of proven to the market that this is sustainable and this is the new level for their market.

The stock sold off violently when the CEO left. I think the market was concerned that he got fired. We don't really know what happened because this upcoming school year is going to be a bust. And how could you not think that? It's hard to imagine the guy getting fired if he was killing it.

I saw this 8-K and I was like, “Oh, my God.” I think I told you. I mean, they fired him—whatever the change was—on July 30th.

It said he departed, you know.

Whatever it is, it was July 30th, and then the new CEO, who is, I think, 71, steps in. And yes, they gave preliminary guidance when they hired the new CEO, but earnings were scheduled for August 4th, and I was like, “Oh, I've seen this movie before.”

You put in the new CEO, give preliminary guidance, and then the earnings come out 3 days later—2 days, whatever it is. You come out and say, “Oh, next year's going to be tough. It's all on the prior guy, though. I'm here to clean things up. Blame the prior guy. I was only a little independent board member here.”

So, look, I would point to a few things. There's always one thing that—you know, I like investors that distill their thesis. What's the one thing that's really going to move the stock? What's that fulcrum question?

So, it's enrollments in the fall. Again, their first quarter, the September quarter, they're going to report enrollments. Usually, they do it 3 to 4 weeks later; let's call it late October. So that's going to be the print that's going to send the stock up 20 points or down 20 points. And the question is: are they going to be able to grow this year? That's really all that matters.

People forget: when I invested, that was kind of the thesis here—that this is a secular grower in an expanding marketplace, generates a lot of cash flow, and they're the market leader. It seems like the penetration—you know, some of your viewers might not know—they run virtual public schools. So it's really underpenetrated: only 1% to 2% of students do full-time, tuition-free, stay-at-home schooling. It's only in 30 states. And it just seems like this business could be much bigger 10 years from now.

And so, really, the question is, the Street is taking down their numbers. I think they have them growing revenue by 2.5% next year and probably barely growing enrollments. So let's just talk about why. The question is: are you going to take the over or the under on enrollment? I'm still very bullish on it.

I’m just triangulating around a few data points, and you can tell me what you think. Number 1, I think the CEO change—the whole thing—is reading tea leaves. But over the last year, in spite of the fact that he had a good multiyear run, it was kind of a disaster. They implemented a new LMS, or learning management system, which is the piece of software they use for curriculum, students, and parents that brings everyone together.

They upgraded to an off-the-shelf provider called Canvas, which is the best LMS in North America, but they told us it was a disaster, as most ERP launches are. They missed their guidance last year. That was number 1, and that was under his watch. Number 2, they lost a school in Texas—a 6,000-student school—which is pretty significant on a base of, call it, 240,000 students.

This is Lonsdale Academy, and it was the first question on their most recent earnings call, for those following along.

Correct. Again, I’ve been following this company for years, and that was an underperforming school. Every year, they have a portfolio. Even though they’re only in 30 states, they have close to 100 schools. Part of the business model is that every single state has multiple schools, precisely for this reason: if you lose one school for whatever reason—if it loses its accreditation—you can re-enroll those students in another school.

So that happened under James’s watch. There were 2 big checks against him during the year that would have made it plausible for the board to say, “Enough is enough.” In spite of the fact that maybe things weren’t falling off a cliff, we’re only going to know when they report. So that’s number 1.

Number 2, I think it’s important that their 1 publicly traded competitor, Pearson, came out the week before. They have a division—this is a holding company that owns a lot of different assets—but the division that does virtual public schools was just ebullient. Things were rocking; demand was very, very strong. You could say maybe they’re taking share from Stride, but it’s hard to know.

If I could jump in there, when I read the Q4 earnings call with the new CFO, he said, “Funding environment looks favorable. Application volumes are maybe slightly behind last year, but still strong, and we’re encouraged by conversion rates.” It doesn’t sound—maybe I’m wrong, maybe they’re lying to me, maybe they’re putting on a brave face—but it doesn’t sound like something that’s about to go negative or have the rug pulled out from under you.

Yeah, I would agree. There are a lot of breadcrumbs here. You have to understand that, optically and mathematically, they basically started the year and are going to end the year with fewer students than they started with, and that sounds really bad. That was self-inflicted because they were having issues with their LMS, and they intentionally throttled back something called in-year enrollment.

So basically, when they report next year, they’re reporting off a lower base than they previously did. Usually, they add students in the middle of the year. But that doesn’t speak to what matters, which is the underlying dynamics of the market and whether it’s healthy or not. I feel strongly that the market is healthy.

Actually, sorry, to go back to LSOA, the school in Texas that they lost, I’m very, very confident that they’re going to be able to enroll a large percentage of the students in the other schools they have in Texas.

That’s what happened in New Mexico, right?

Correct. That happened the previous year. Again, this happens every year. But part of the uncertainty going into the CEO’s departure was that this was the only school in Texas that had K–2, which was relatively unique—a smaller niche within the market. There was no other K–2 school, so Stride had a private school that they were going to use to give those students in those grades a free education.

They were able to get permission from the Texas regulator to open up K–2 in Texas. I just think that supports my view that, more likely than not, they’re going to be able to retain those students. But again, there’s a lot of smoke here, so I totally understand why the market would be skittish in this context.

If I can follow up on 3 different things. First, on the CEO change, I’m sure you did tons of expert calls. I liked our podcast so much that I did a few expert calls, and a lot of the former employees I talked to were not big fans of the old CEO, to put it mildly. I know some people who viewed him as a blocking factor.

So when I saw the change, I thought, “I don’t know. The timing was not great, but I didn’t know if it was as big a negative as people thought.” I thought it actually might be positive. Related to that, I’ll note the new CEO’s contract. He’s a 70-year-old stepping into a tech business, and his contract spends a lot of time on what happens if this business gets sold. I thought all of that was very interesting. I’ll pause there and add 2 other things I wanted to say.

He’s an impressive guy. If you look at his résumé, he’s been on a lot of company boards. It sounds like he understands share-buyback math. Most importantly, he worked in the education industry; James did not. I feel like, in order to take this business to its next level, you need someone who has credibility within it.

I mean, it sounds ridiculous, but I could have seen the stock being up on the news. There’s just so much uncertainty, given the fact pattern going into it, that the market just said, “Forget about this.”

The feedback on the old CEO—the thing I heard across the board was, I believe he was the CFO before he became CEO, right? It was a CFO running a business where relationships and education mattered. I think the financial results were really impressive, but there were a lot of people who worried about that combination.

The other thing I want to talk about is that we did the podcast in January. I’ll trust your memory—was that right at the start of the real SaaS sell-off? From mid-January to mid-March, if you had bought SaaS in mid-January through mid-March, you were just covered in blood. LRN is not SaaS per se, but it’s not immune.

As the SaaS apocalypse happened, a lot of my worries about this—and the worries of a lot of people I was talking to—were about AI. I think there was a pushback: “Hey, these guys are going to be better than public schools at adopting AI.” But I think there was another pushback: “You don’t need to compete with the public schools. You need to compete with online and AI spreading in general,” as lots of competitors started up.

I mention this because now we’re in July, and I think some of those AI fears may have subsided. I would also mention that Alpha School came up time and time again, and people were saying, “Look how great the results are.” I think they’ve had poor results when they’ve tried to take their private charter-school model to public schools. I threw a lot out there, but I’d love to get your update on AI as it relates to Stride.

Yeah, there’s also this: back in July, Stride came out with an offering for K–12 teachers. It wasn’t even a school, just a way to help teachers with their curriculum. The stock was down 5 or 10 points on that, so the market is clearly thinking that way. How could it not?

But I would just say that anyone who’s concerned about AI taking over this business hasn’t done enough work in terms of understanding how messy and complicated this is. This is literally, soup to nuts, a brick-and-mortar school; the only difference is that it’s online. That means there are teachers and physical textbooks. They’re distributing textbooks and laptops to all the kids.

You have to be credentialed, right? This is taxpayer-funded. When you go down the list, there are tons of different stakeholders: parents, students, and teachers’ unions. There’s just a lot going on. Anyone who casually says AI is going to blow this up—there’s no way.

More likely, one of the biggest line items, curriculum, will be affected, because the curriculum has to be customized based on the state and even the district. There are 12 different grades; it’s not just 1 SKU. One of the biggest things people don’t appreciate is that if you’re going to take taxpayer money, you have to be willing—you have to be open—to everyone.

Students with disabilities and kids who have individualized education plans because they have some type of learning disability—you have to cater to all their needs and provide for them. Spend a couple of hours going on chat groups for parents and stuff, and you’ll quickly realize that there’s no way someone is going to let a piece of AI software come in and run this thing.

No, and I can’t claim to be the world’s foremost expert, but in the few tweets and things I saw written, this is what people were saying about Alpha School. I maybe feel silly for being worried, but they were saying, “Yes, Alpha School—when you’re only recruiting and can screen for gifted students, so all your students are gifted and all of their parents can pay $50,000 a year for private school—it turns out your results are pretty damn good with AI.”

But when you consider that, as we talked about in the first podcast, a lot of the students who come to Stride are dealing with much bigger issues—they’re coming from public schools, they might have troubled backgrounds, and they might be moving around a lot—the Alpha School model might work great for people who have every advantage in the world, but public school needs to serve everyone. Stride is operating in a very difficult environment and putting out pretty good stats, as we discussed, given all that. Anything else we should be updating on Stride?

I just think people, when they think about the investment, have to abstract and think that they’re really being long school choice here. We’re not getting rid of compulsory K–12 education. There are very substantial economies of scale when you’re able to operate like any technology business.

That’s what James was able to do. That’s why the stock was up over 10 times under his watch, which is really impressive, because they were able to invest more than the competition, and they were also able to show some pretty significant operating leverage. On the demand side, from parents and students, there’s a huge population of people who use it—not just people who like it, but people who are desperate for it because they don’t fit into the regular school system.

When you have that dynamic, where people crave your product, really want your product, need your product, and are willing to go to bat for you—especially if there’s something in the state legislature—I think the political risk has actually been dramatically reduced post-COVID. This used to be a nice-to-have; now it’s a must-have, because what if there’s another pandemic?

That’s kind of a sea change. Eventually, maybe this is going to be a year where—who knows what happens? They were conservative on the call. Why not? I would have been conservative coming out of the gate.

Totally. Again, this is one of the reasons they didn’t give 2027 guidance, and you worry they get the new guy in and he’s just going to come in, throw everyone under the bus, and say, “Hey, we’re slashing everything. We’ve got no visibility.” But yes, you would have liked it if they said revenue was going to be up 30%, they were going to enroll double the students, and everything was going to the moon. They were pretty positive on the call, all things considered.

Worst case, I was just thinking about Canvas. Canvas is their learning management system, and that was the cause of the big sell-off. The stock was down about 60% on the Canvas implementation. It turns out Canvas is owned by a company called Instructure, which is owned by KKR.

In the worst case, this thing has a reset year. I can’t imagine they don’t know this asset. They probably could figure out—

That was my last question, actually. Would you be surprised if this were a public company in 18 to 24 months?

I don’t know. I’m not playing that game. I never try to make that part of the thesis. I don’t know how to handicap that, but I think it is interesting that they could insource the cost of the LMS. They probably see what’s going on—you know it better than anyone else—and see that, ultimately, if the demand is there and they continue growing, this is a great business, and it’s going to be around for a long time.

I think this is much more likely than your average public company to get taken out, both because of the nature of this business and the recent CEO change. But much more likely than your average public company—does that mean 5%, 10%, or 75%?

I’d take under 75%, but I’d probably take over 5%. That’s a long, long range.

Andrew, this has been great. I enjoyed it. Again, I’m going to include a link to the LRN write-up so people can see the full write-up there. You’ve got to read through to the conclusion, because that conclusion paragraph is just such a banger. I’d love to have you on for a third podcast in the near future.

All right, good stuff, Adam. Thank you. Bye.