Grand Canyon Education’s stock price has taken a beating over the past six months, shedding 23.1% of its value and falling to $161.09 per share. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Grand Canyon Education, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think Grand Canyon Education Will Underperform?

Even with the cheaper entry price, we're cautious about Grand Canyon Education. Here are three reasons why LOPE doesn't excite us and a stock we'd rather own.

1. Weak Growth in Students Points to Soft Demand

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

Grand Canyon Education’s students came in at 131,826 in the latest quarter, and over the last two years, averaged 7.9% 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

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Grand Canyon Education’s weak 7.2% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.

3. Free Cash Flow Projections Disappoint

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’ consensus estimates show they’re expecting Grand Canyon Education’s free cash flow margin of 21.6% for the last 12 months to remain the same.

Final Judgment

We see the value of companies helping consumers, but in the case of Grand Canyon Education, we’re out. After the recent drawdown, the stock trades at 16.5× forward P/E (or $161.09 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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