Laureate Education trades at $36.60 per share and has stayed right on track with the overall market, gaining 8.1% over the last six months. At the same time, the S&P 500 has returned 7.8%.

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Why Do We Think Laureate Education Will Underperform?

We’re cautious about Laureate Education. Here are three reasons why LAUR doesn’t excite us, plus one stock we’d rather own.

1. Weak Growth in Enrolled Students Points to Soft Demand

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

Laureate Education’s enrolled students came in at 507,700 in the latest quarter, and over the last two years, averaged 5.6% 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 Barely Growing

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Laureate Education’s EPS grew at a weak 4.2% compounded annual growth rate over the last five years, lower than its 11.1% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

3. Free Cash Flow Projections Disappoint

Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Over the next year, analysts’ consensus estimates show they’re expecting Laureate Education’s free cash flow margin of 15.2% for the last 12 months to remain the same.

Final Judgment

Laureate Education doesn’t pass our quality test. That said, the stock currently trades at 18.4× forward P/E (or $36.60 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better investments elsewhere. We’d recommend looking at a top digital advertising platform riding the creator economy.

Stocks We Would Buy Instead of Laureate Education

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