Online Educator 2U To Benefit From Closed Campuses

After a 127% rally post 23rd March, we believe 2U Inc. stock (NASDAQ: TWOU) has moderate upside based on its valuation. 2U’s stock has rallied from $17 to $38 off the recent bottom compared to the S&P which moved 51%. One of the reasons for the high recovery was the Fed’s multi-billion dollar stimulus package announced on March 23rd which lifted market sentiments. The company further beat the earning estimates in Q1 and Q2 2020. The stock then has gained on the possibility that most college campuses will remain closed for part of the 2020-2021 academic year raising the demand for 2U’s technology.

2U’s stock has reached the current level after recovering from the drop in February and March due to the coronavirus outbreak becoming a pandemic. Due to the pandemic, demand and revenues will likely be higher than last year which could take the stock higher in the near term.

The company fell 41% in share price since the end of 2017, some of this fall over the last 2 years was offset by the 100% increase seen in 2U’s revenues from 2017 to 2019, while its losses increased from $29 million in 2017 to $235 million in 2019.

The company has seen a good revenue growth over recent years, while its P/S (price-to-sales) multiple has fallen. We believe the stock has limited upside after the recent rally and the potential uncertainty due to the Covid outbreak. Our dashboard What Factors Drove -41% Change In 2U, Inc Stock Between 2017 And Now? has the underlying numbers.

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2U’s P/S multiple fell from 11x in 2017 to around 2.5x in 2019. While the company’s P/S has now risen to around 4x there is a limited upside as the demand for 2U’s technology rises in lockdown scenarios.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. Due to the stay-at-home orders there have been increases in the demand of online education technology. 2U’s Q2 results confirmed the same as it recorded a 35% increase in its revenue. Graduate Program Segment revenue grew 14% to $115.7 million driven by an 18% increase in full course equivalent (“FCE”) enrollments. Alternative Credential Segment revenue increased 97% to $67.0 million, driven by FCE enrollments of 20,435.

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value.

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