Unveiling the 2U Meltdown: Is It Time to Snap Up a Bargain or Bail Out? cover

Unveiling the 2U Meltdown: Is It Time to Snap Up a Bargain or Bail Out?

In the tumultuous world of stocks, few stories are as compelling as the sudden nosedive of 2U (NASDAQ:TWOU). As the market recoils from the recent plunge in the company's stock following disappointing third-quarter results, investors are left questioning the once-bright prospects of this online education platform. What exactly happened to trigger this sharp decline, and is it a sign of deeper troubles within the company? Let us find out!

2U – Business Overview

2U, Inc. functions as an online education platform operating both domestically and internationally, categorized into two key segments: Degree Program and Alternative Credential. Within the Degree Program segment, the company furnishes technology and services to nonprofit colleges and universities, facilitating the online delivery of degree programs, with a focus on students pursuing undergraduate or graduate degrees. In contrast, the Alternative Credential segment specializes in delivering online open courses, executive education programs, technical, skills-based boot camps, and micro-credential programs through nonprofit colleges and universities. This segment is tailored for students seeking to reskill or upskill for career advancement or personal development, offering shorter duration and lower-priced educational options. 2U, Inc. serves as a platform providing technology and technology-enabled services to support these educational endeavors.

What Happened?

2U's stumble was sparked by lackluster performance in its coding boot camps and higher-priced degree programs, leading to a decision to exit certain partnerships. This setback raises concerns about 2U's role as a facilitator in the high-demand field of STEM education. In response, the company is undertaking measures to fortify its financial standing, including debt refinancing and a 12% reduction in workforce. While 2U has unveiled plans for 80 new degree programs in 2024, promising a potential $120 million in incremental annual revenue, questions linger about the feasibility of these initiatives. The stock's drastic 80.8% decline since the beginning of the year prompts a critical evaluation of whether this once high-flying investment is now a bargain or a sinking ship.

Flex Degree Model & Portfolio Management Strategy

As a part of a turnaround strategy, 2U, Inc. is strategically pivoting its degree business towards a more competitive and affordable portfolio. The introduction of the Flex Revenue Share Model, allowing universities to obtain product and services with a tiered revenue share based on their needs, has enabled 2U to profitably deliver lower-cost degrees. This flex model not only accommodates a more diverse set of partner universities but also positions 2U to swiftly adapt to market demands. The recent portfolio management activities, involving the exit of underperforming degree programs and the launch of over 80 new degrees in 2024, underscore the company's pledge to reshaping its offering. By reallocating resources from discontinued programs to those remaining in the portfolio, 2U aims to generate significant cash in the short term, enhancing its balance sheet and fueling investments in growth areas. The emphasis on affordability and flexibility in program offerings aligns with the company's vision for sustained profitable growth, with confidence bolstered by positive leading indicators in the Degree segment.

Enterprise Business Growth & Market Leadership in OPM

Despite challenges in specific segments, 2U remains a market leader in Online Program Management (OPM) for degrees. The enterprise business exhibited a robust 22% growth in the last quarter, positioning it to potentially double in the coming year. With a strategic focus on building a more competitive and affordable portfolio, 2U is leveraging its flex revenue share model to offer a diverse set of degrees, meeting significant market demand. The company's ability to secure contracts for over half of the planned 80-plus launches in 2024 reflects strong demand from university clients. The 32% year-over-year growth in the executive education business and the emphasis on cohort-based programs with high completion rates indicate the effectiveness of 2U's approach to sustained growth. By maintaining market leadership in OPM, the company aims to capitalize on the rising demand for online education while adapting to evolving market dynamics.

Responsive Cost Management & Focus on Profitability

In response to the challenges faced in the Alt Cred segment, particularly in coding boot camps, 2U is taking a proactive approach to reassess and optimize its business. Acknowledging the softness in coding enrollments, the company is aimed at making the Alt Cred segment profitable and cash flow positive. Cost management actions, including a 12% reduction in headcount, are expected to yield annualized cost savings of $55 million, demonstrating a focus on operational efficiency. Despite the underperformance in certain areas, the company's emphasis on profitability is evident in the decision to transition out of degree programs with a client and exit certain programs with USC. These strategic moves, along with ongoing portfolio management activities, aim to strengthen the balance sheet, enhance liquidity, and position 2U for sustained profitability in the face of evolving market dynamics.

Final Thoughts

Source: Yahoo Finance

After the recent crash, 2U’s stock is trading at an Enterprise Value/ Revenue multiple of 1.34x which does appear reasonable but we must remember that the company has shown a declining revenue trajectory and is also incurring losses each year. The massive selloff could be seen as a buying opportunity but only for those investors who have a very high risk appetite and think of the ed-tech player’s stock. Overall, we believe that 2U is a highly risky proposition that is best avoided at current levels.