Shares of Folsom-based education software company PowerSchool Holdings Inc. dropped nearly 10% following the release of a critical report by a short-seller investor who says the company faces headwinds and potential state privacy law violation concerns.
New York-based Spruce Point Capital Management LLC released the report today, and PowerSchool (NYSE: PWSC) shares fell 9.83%, or $1.94 a share, to close at $17.79.
Spruce Point estimates that PowerSchool shares could fall 30% to 60% from their closing price Tuesday of $19.73.
PowerSchool representatives didn’t respond to an email seeking comment.
PowerSchool launched in Folsom in 1997, offering online tracking of grades and attendance. Over the years it's added more functionality and modules to support school administrators, teachers, parents and students on a cloud-based platform supporting 50 million students globally.
The company went public in an initial public offering in 2021.
The Spruce Point report is critical of PowerSchool’s market position, its legal privacy exposure, its management’s share sales and its financial reporting, among other issues.
The short seller’s report starts out pointing out that the vast sums of money the federal government poured into schools to support their efforts during the Covid-19 pandemic are expiring in September this year.
The federal government’s Elementary and Secondary School Emergency Relief Fund, or ESSER, provided nearly $200 billion in direct aid to K-12 districts, the report said, adding that the program's expiration will put pressure on vendors like PowerSchool during contract renewals.
Spruce Point also alleges that PowerSchool’s Intersect higher-education guidance program may potentially be violating California’s Student Online Personal Information Protection Act, which regulates K-12 student data. Similar laws have been passed in nearly 30 states, Spruce Point said.
“Spruce Point tries to look for problematic companies with questionable management and accounting practices and, crucially, that we feel are misunderstood by the market,” said Daniel Oliver, Spruce Point chief operating officer, via email. “PowerSchool fit those criteria for the reasons we detail in the report.”
Oliver said Spruce Point is short PowerSchool stock “but we do not disclose our trading timing or sizing.”
The report also points out that stock analysts of PowerSchool give it a "buy" rating with a price target over $27 per share, but current senior executives of the company have been “heavy sellers of stock at or below $21 per share or 25% below the consensus price target.”
The report also expresses concerns that at least seven senior-level executives left the company following its IPO in 2021, forfeiting substantial awards of company shares it estimates could have been worth $17 million. It cites as concerns the loss of a chief revenue officer, chief marketing officer, chief operating officer, chief accounting officer, chief product officer and the senior vice president of corporate development after the IPO.
In its report, Spruce Point discloses that it and its clients have a short position in PowerSchool, and that they own derivative securities “that stand to net benefit if its share price falls.”
PowerSchool supports students globally and more than 15,000 customers, including more than 90 of the top 100 school districts by student enrollment in the U.S., and it sells products in more than 90 countries. The company has made at least 20 acquisitions in the past nine years, adding more functions and products to its suite of cloud-delivered products.
PowerSchool is set to release its first-quarter financial results after the close of markets May 7.
The report also says Eric Shander, PowerSchool’s chief financial officer, has a “questionable past.” Shander was previously CFO of open-source software company Red Hat and was part of the team that engineered IBM's $34 billion buyout of Red Hat in 2019. Red Hat said Shander was dismissed in 2019 without pay in connection with Red Hat’s workplace standards. Shander was in line for a $4 million bonus if he stayed on for one year following the IBM (NYSE: IBM) merger.
