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2U Purchase of edX is a Class Act
Stock Analysis & Ideas

2U Purchase of edX is a Class Act

The American educational technology company 2U Inc. (TWOU) is buying edX’s assets in a cash deal for $800 million. The combination is likely to expand 2U’s leadership position in the market and result in 10%-15% annual marketing cost efficiencies. The deal is expected to be accretive to 2U’s adjusted EBITDA in FY23, but dilutive to adjusted EBITDA by a low single-digit percent in FY22.

Feeling optimistic about the deal, Needham analyst Ryan MacDonald predicted that it will enhance 2U’s strategic position by improving the efficiency of its model.

Given the potential revenue and cost synergies expected, MacDonald considers the deal attractively valued. Therefore, the analyst reiterated a Buy rating and a price target of $61, implying an upside potential of 46.4% from current levels.

Given the global recognition of edX’s website and marketplace, the analyst believes that the integration of edX will enhance marketing efficiency for 2U. He added that the edX acquisition complements 2U’s strategy of expanding its reach to prospective learners, with a focus on forming new partnerships and saving on digital marketing costs. (See 2U stock chart on TipRanks)

The 5-star analyst remains positive about the long-term. He expects that edX offerings, including micro-bachelors degrees, micro-masters degrees, and edX for business, will aid 2U in sustaining decent levels of growth through strategic relationships with university partners and access to new market segments.

According to MacDonald, 2U’s current valuation does not fully reflect the benefit of the ongoing shift to online education, and does not recognize the company’s advancement in curbing cash burn. Therefore, over the long term, the analyst believes that the company’s scaled unit economics will yield a 20% EBITDA margin, and the current discounted valuation offers an attractive entry point.

Consensus among analysts is a Strong Buy based on 4 Buys and 1 Hold. The average 2U price target stands at $59 and implies upside potential of 41.6% to current levels. Shares have gained almost 8% over the past year.

TipRanks’ Stock Investors tool shows that investors currently have a Very Positive stance on 2U, with 7.5% of investors maintaining portfolios on TipRanks increasing their exposure to TWOU stock over the past 30 days.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your analysis before making any investment.

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