With an ever-increasing transition from in-person learning to online platforms, 2U (NASDAQ: TWOU) has positioned itself as a leading e-learning platform provider. Its cloud-based SaaS offering covers everything from the platform itself to the design of courses and infrastructural support.
The bull case for 2U
2U took advantage of universities having to close their doors due to COVID-19. The company is diversifying its revenue streams somewhat in recent years, with its Degree Program accounting for 63% of revenue last year, catering to graduate and undergraduate online degrees.
The remaining 37% of revenue is attributable to the Alternative Credential segment. This provides technical certifications for numerous subjects, including digital marketing, cybersecurity, and coding. The goal of the Alternative Credential offering is to reduce 2U’s dependency on costly partnerships with universities.
Typical program development with a university could cost as much as $10 million, with revenue often taking up to 12 months to receive. Therefore, it has focused on developing more short-term offerings, while lowering the costs and number of high-end programs it is building.
The company’s revenue grew by 35% year-on-year in 2020 to $774.5 million. It also experienced strong growth pre-pandemic, with a 40% increase in 2019 and a 44% jump in 2018. Further growth of 17% to 22% is expected in 2021. 2U has also built up an impressive collection of high-profile university partners, including the London School of Economics, Harvard University, and the Stanford Center for Health Education. This social proof is very useful when trying to attract universities and students alike.
The bear case for 2U
Despite the consistent increases in revenue, 2U still recorded a net loss of $216.5 million last year while it also expects a net loss of between $165 million and $185 million in 2021. These losses will concern investors and are due largely to the high marketing spend needed to acquire new business.
While 2U has managed to build up an impressive collection of partner universities, these deals are not exclusive. There are numerous competitors active in this space, which can potentially cause problems down the line. There has also been a steep decline in enrolment numbers in universities on the back of the pandemic. Based on preliminary figures, there was a 2.5% (about 400,000 people) net decrease in U.S. university enrolments in 2020, double 2019’s figures.
People have been rallying against the high cost of third-level education in the U.S. for some time, therefore, a continuing trend in this direction would have a negative impact on 2U’s business.
So, should I buy 2U stock?
2U’s stock price has increased by over 70% since March 2020. While it has posted consistently strong revenue growth in recent years, it is still operating at a big net loss. While 2U appears to have a very polished offering and is attempting to become less reliant on high-cost university programs, it is still heavily dependent on the success of its partners.
If enrolment numbers continue to fall and/or universities start cutting the prices of their programs, this will lead to negative knock-on consequences for 2U. With so much uncertainty, it is probably best to take a wait-and-see approach with 2U.
How many university partners does 2u have?
It has more than 75 different university partners.
Who is the CEO of 2U?
Christopher “Chip” Paucek is the CEO and co-founder of 2U.
Is 2U profitable?
2U is not profitable, with the company’s net loss for 2020 being $216.5 million.
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Contributing Writer at MyWallSt
Andrew is a contributing writer to MyWallSt. He is a full-time finance writer, having spent time working in the industry. He studied Economics and Finance and has been fascinated with the financial markets since his teens. The first stock that Andrew bought was Apple, reflecting his love for its products.