Powerschool Stock’s Buyout Bait: Don’t Get Hooked on a Risky Rumor

Stock Market

Betting on buyout buzz is high-risk and potentially high-reward. Takeover talk is already swirling around Powerschool Holdings (NYSE:PWSC), and a sell-the-news event could decimate Powerschool stock. So, don’t load your portfolio with shares if you’re serious about protecting your wealth.

Based in California, Powerschool offers cloud-based education software for kindergarten through 12th grade. The Covid-19 catalyst for educational software isn’t as strong as it was in 2020 and 2021.

Plus, in a time of persistent inflation, school districts might cut back on software-update spending. Investors should conduct careful due diligence on Powerschool before considering a share position.

Powerschool’s Widening Earnings Loss

A good starting point for your due diligence is to look at Powerschool Holdings’ first-quarter 2024 financial report. This report presents what you might call a good-news, bad-news scenario.

The good news is that Powerschool grew its revenue 16% year over year (YOY) to $184.967 million in Q1 2024. Furthermore, Powerschool guided for full-year 2024 revenue of $786 million to $792 million. This implies moderate revenue growth compared to the aforementioned first-quarter result.

The bad news is that Powerschool incurred a first-quarter 2024 net earnings loss of $22.848 million. This is, unfortunately, significantly wider than Powerschool’s net loss of $14.813 million from the year-earlier quarter. It’s a serious concern, and prospective investors should want to see some bottom-line improvement in the coming quarters.

Don’t Fall Into the Buy-the-Rumor Trap

I suspect that some people won’t pay much attention to Powerschool’s less-than-ideal financials, and will only buy Powerschool stock because they’re expecting a takeover of the company. However, that’s a dangerous reason to buy the shares.

In a highly efficient and forward-looking market, stocks can quickly rise on takeover talk and barely move, or even decline, when a buyout actually occurs. Worse yet, acquisition negotiations can breakdown and, as a result, stocks might quickly decline.

Chatter about a potential buyout of Powerschool by Bain Capital (NYSE:BCSF) has already been documented here, here and here. Moreover, Bloomberg published a report about private-equity firm Warburg Pincus (OTCMKTS:WPCBF) potentially being interested in acquiring Powerschool.

So, the buyout buzz is already loud and clear. It’s in the financial headlines, and the acquisition anticipation may have already been priced into Powerschool stock.

Powerschool Stock: Position Sizing Is Key

Powerschool Holdings’ financials aren’t ideal, especially if you’re a stickler for profitability. Hopefully, Powerschool will be able to shrink its net earnings loss in the next few quarters.

Meanwhile, it’s dangerous to invest in a potential buyout of Powerschool because the buy-the-rumor buildup could quickly result in a sell-the-news event. Hence, it’s fine if you don’t want to buy Powerschool stock at all. And if you do choose to purchase shares, please keep your position size small because the risk level is quite elevated right now.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.

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