Stock Analysis & Ideas

2U Rides on edX Acquisition & Strong Fundamentals

The pandemic set the ball rolling for enrollments in EdTech company 2U, Inc.’s (TWOU) education programs. The company is also benefiting from its efforts to optimize costs, which are tailwinds to the margin.

Needham analysts, led by Ryan MacDonald, recently participated in an annual summit, which was collaboratively hosted by Arizona State University (ASU) and Global Silicon Valley (GSV). The ASU GSV Summit 2021 brought together various companies, investors and university representatives to discuss key innovations to shape the future of education, improve the outcomes of learning, invest in promising ventures, etc. The conference also helped the analysts gain key insights into the EdTech sector in which 2U primarily operates.

A lot of focus was given to 2U’s impending acquisition of Harvard and MIT’s collaborative education platform edX, which is on track to close by the end of October this year. The acquisition is expected to expand 2U’s leadership position in the domestic as well as international EdTech market and bring 10%-15% annual marketing cost efficiencies. (See 2U stock chart on TipRanks)

However, the acquisition will bring about various convolutions in the core model of edX, as it will shift from non-profit to for-profit, and adopt ASC 606 accounting methodology. This will result in increased expenses in the initial months after the acquisition, making the analyst apprehensive about 2U’s near-term profitability.

Nonetheless, MacDonald envisioned the longer-term scenario to be favorable for the company. Management at 2U did not deter from its commitment to achieving breakeven free cash flow soon. The company is also positive about an increase in degree enrollments during the Fall Semester.

The online education market has become increasingly competitive over the past decade, attracting significant investments from venture capitalists. However, for the last eight months, new university partnerships have been starkly absent from the online education scene, as companies have been building on existing university associations. This has started to bother investors.

Interestingly, 2U took this opportunity to announce not only a new partnership with Howard University but also a new online MBA program in collaboration with the University of Miami.

MacDonald was particularly impressed with these announcements as they come at a time when most of 2U’s peers are offering lower revenue shares to win business. This will ensure a stronger competitive position for the company.

“Looking ahead, a number of vendors we spoke with are focusing investments in verticals like healthcare and data science, which are seeing a strong increase in student interest. We would expect a similar focus of content expansion, whether it be full programs or alternative credentials, from 2U as well,” the analyst observed.

The company also expanded its short-course collaboration with the University of Oxford. Additionally, it is also a tech partner to Howard University’s online Master of Social Work program. These points particularly encouraged MacDonald, who stated, “We view this announcement and new partner win as a positive data point in 2U’s ability to capture new customers as universities seek ways to expand their footprint.”

The Wall Street is optimistic about the stock and has a Strong Buy consensus rating based on 6 Buys and 1 Hold. The average 2U price target of $62.50 implies 68.7% upside potential from current levels.

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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 own analysis before making any investment.

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