2U (NASDAQ: TWO) The stock has more than doubled in the last 12 months, as the education technology company, which helps colleges and universities to offer online education, created robust growth throughout the pandemic. But is it a worthy long-term investment?
How does 2U make money?
Founded in 2008, 2U enjoyed an early movement advantage in its market. After signing his first contract with the University of Southern California in 2009, other major universities such as Georgetown, Syracuse, Northwestern, UC Berkeley and Yale followed suit.
The company divides its business into two main segments. Its education business, which generated 63% of its revenue in 2020, provides both undergraduate and graduate degrees online. The company only started offering bachelor’s degrees in 2019.
Its Alternative Credential business, which generated the remaining 37% of its revenue, offers technical certifications for a wide range of topics, including coding, cybersecurity, digital marketing and supply chain management.
It built this newer company on top of two acquisitions: the short course development company GetSmarter in 2017 and the IT boot camp company Trilogy Education Services in 2019. 2U gradually expanded this segment to reduce its reliance on pricey and rigid university partnerships.
How fast is 2U growing?
2U generated impressive top-line growth ahead of the pandemic. Its revenue increased by 39% in 2017, a further 44% in 2018 and 40% to $ 574.7 million in 2019.
Adjusted net losses narrowed in 2017 and 2018, but they expanded significantly from $ 3.5 million in 2018 to $ 71.9 million the following year. Management attributed the massive loss to the rising costs needed to get more students, and its stock lost more than half of its value through the year.
In 2020, revenue increased by 35% to $ 774.5 million with 17% growth in education programs and 83% growth in alternative credentials as adjusted net loss narrowed to $ 63.7 million.
These bottom line improvements are attributed to two main factors. First, the degree segment’s profit margin expanded as its marketing effectiveness improved and its mature programs generated strong growth throughout the pandemic. Second, although the profit margin for the Alternative Credentials segment remained negative, it improved year over year as the company launched new courses and integrated Trilogy’s IT boot camp.
2U expects its revenue to increase 17% to 22% by 2021 with a declining net loss of $ 185 to $ 165 million. Management also expects adjusted EBITDA to increase 180% to 304% to a full-time level of $ 45 million to $ 65 million.
An uneven road ahead
Based on management’s expectations, the 2U share is trading approximately four times this year, making it fairly inexpensive in terms of growth.
However, the company’s offerings with universities are not exclusive and it still faces a long list of competitors, including Coursera in online university degrees, Udemy in technical certifications and Microsoft‘s LinkedIn learning in casual online courses. Enrollment rates for universities have also fallen sharply throughout the pandemic, even as schools struggle to offer more online courses.
These headwinds could push 2U’s margins again and make it more difficult for the company to generate consistent profits.
Is 2U worth buying?
2Us business model is innovative and disruptive, but its basics are not healthy enough to justify an investment right now. Its revenue growth is slowing down; it is deeply unprofitable; and it simply faces many headwinds with headwinds.
This article represents the author’s opinion, that may disagree with the “official” recommendation position for a Motley Fool premium advisory service. We are motley! Questioning an investment dissertation – even one of our own – helps all of us think critically about investing and make decisions that help us become smarter, happier and richer.
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