Reported Company:

PowerSchool Holdings

Researcher Company:

Spruce Point Management

Price at Report Date:

Close Price Day after report date:

22.85

% Decline Day after Report Date:

% Decline vs Yesterdays Date:

-0.1751

Summary

Spruce Point Capital Management, a prominent activist short-seller, has published a detailed report targeting PowerSchool Holdings, Inc. (NYSE: PWSC). The report raises significant concerns about the company’s accounting practices, legal compliance, and the sustainability of its growth. Spruce Point foresees a 30% to 60% downside risk in PowerSchool’s stock price.

Who is PowerSchool Holdings?

PowerSchool Holdings, Inc. is a leading provider of K-12 education software in North America. The company offers a range of products, including its flagship Student Information System (SIS), which helps schools manage student data such as attendance, grades, and schedules. PowerSchool serves over 45 million students across 90 countries and has grown through a series of acquisitions to expand its product portfolio.

Key Points from Report

Inflated Revenue and Aggressive Accounting

• Premature Revenue Recognition: PowerSchool may be recognizing revenue before its products are fully implemented and usable by customers, leading to potentially overstated financials.
• Dubious Adjustments: The company’s growth in Adjusted EBITDA is driven by non-operational factors such as capitalized software development costs and restructuring expenses. Spruce Point alleges these adjustments inflate the company’s earnings.

Legal and Regulatory Risks

• Data Privacy Concerns: PowerSchool’s Intersect product may be violating state laws protecting student privacy, particularly the Student Online Personal Information Protection Act (SOPIPA). The company is already facing a class-action lawsuit related to its Naviance platform.
• Management Red Flags: The abrupt resignation of key executives, including the Chief Accounting Officer, coupled with the CFO’s controversial history, raises concerns about the company’s internal governance and oversight.

Unsustainable Growth Expectations

• Fiscal Cliff in K-12 Funding: The report highlights that the expiration of COVID-19 emergency funding (ESSER funds) in 2024 will create a “fiscal cliff” for K-12 school districts, potentially leading to a significant reduction in technology spending. This could severely impact PowerSchool’s ability to renew contracts and sustain its current growth rate.
• Market Overvaluation: Spruce Point believes PowerSchool’s stock is significantly overvalued, given its high leverage, aggressive accounting practices, and the looming fiscal challenges in its core market.

Management and Board Issues

• Questionable Backgrounds: Several board members and executives have histories of involvement in companies that faced legal or ethical challenges. This includes ties to Career Education Corporation, which settled major claims for deceptive practices under the leadership of a current PowerSchool board member.
• Insider Selling Pressure: Significant stock sales by the company’s largest shareholders, Vista Equity Partners and Onex Corporation, suggest that insiders may not be confident in the company’s long-term prospects.

Activ8 Finance Analysis

Spruce Point Capital Management’s report on PowerSchool Holdings highlights several red flags that suggest the company’s current stock valuation may not be sustainable. The combination of aggressive accounting practices, potential legal violations, and the impending fiscal challenges facing K-12 districts presents a risky outlook for PowerSchool. Investors should carefully consider these factors and exercise caution, particularly in light of the significant insider selling and management turnover.