Stock Analysis & Ideas

2U Faces Financial Risks Related to edX Acquisition

2U Inc. (TWOU) is an educational technology firm. The company provides universities with a cloud-based SaaS platform and infrastructure support, and even develops curricula to help them run online degree programs.

Despite the fact that online education via edtech platforms had existed long before the onset of COVID-19, the pandemic has proven to be a catalyst for this education technology company. Enrollment in 2U’s education programs has increased dramatically in the last year.

However, the stock may be weighed down by the uncertainties surrounding its recent edX acquisition. EdX is an online learning platform and education marketplace. This writer is Neutral on TWOU stock. (See TWOU stock charts on TipRanks)

Let’s take a look at what has changed in the company’s key risk factors that investors should know.

2U Risk Factors

According to the new Tipranks Risk Factors tool, 2U’s main risk category is Finance & Corporate, which accounts for 37% of the total 65 risks identified for the stock. The next two major risk factor contributors are Legal & Regulatory, and Tech & Innovation, at 22% and 14%, respectively.

Since June, the company has added two new risk factors under the Finance & Corporate category.

Both the new risk factors are related to 2U’s acquisition of edX, worth $800 million, which was announced in June.

Under the Corporate Activity and Growth sub-category, the company said, “The edX Acquisition may not be consummated.” Here, the company cautions the investors that the closure of the edX deal does not remain certain, as it is subject to a variety of risks, including government and other related approvals.

Furthermore, the company warns that even if the edX purchase is completed, the integration process could be delayed. As a result, the company would be unable to achieve the anticipated benefits from the transaction, significantly hurting its financial status.

On the brighter side, the overall sector average for the Finance & Corporate risk factor is 38.6%, slightly higher than the average risks in that category for 2U, which is 36.9%.

2U Financial Performance

Now let’s dive into the company’s financial performance for the second quarter.

2U reported strong revenue growth, exceeding analysts’ expectations.

Revenues were $237.2 million, up 30% year-over-year, and exceeding the consensus estimate of $233.3 million. This was the eighth quarter in a row of sequential gains for the company. The top-line growth was driven by strength in the degree business as well as the alternative credential market.

On the other hand, the company posted a loss of $0.29 per share, which was less than the year-ago loss of $1.03 per share. Markedly, in recent quarters, the company’s losses have decreased moderately.

During the earnings call, 2U CEO Christopher Chip Paucek said, “As we work to close our recently announced edX acquisition, we are excited and energized by the opportunities it creates to expand access to affordable, high-quality online education globally and to deliver greater value for all of our stakeholders.”

Wall Street’s Take on TWOU

2U stock commands a Strong Buy consensus rating, based on 6 Buys and 1 Hold.

As for price targets, the average TWOU price target is $62.50, reflecting a potential 12-month upside of 68.6% from current levels. 

Bottom Line

The stock of 2U has fallen by almost 15% over the past year. Moreover, the stock’s TipRanks SmartScore, which comprises 8 unique data sets, indicates that the stock is likely to underperform market expectations.

Nonetheless, given the spreading of the delta variant and uncertainty related to the COVID-19 crisis, 2U remains well-positioned to benefit from new partnerships and collaborations with reputed universities in the future.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of Tipranks or its affiliates, and should be considered for informational purposes only. Tipranks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. Tipranks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by Tipranks or its affiliates. Past performance is not indicative of future results, prices or performance.

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