Education technology company 2U, Inc. (TWOU) in Landover, Md., operates through two segments–Degree Program and Alternative Credential. Currently, the company has 230-plus institutional partners and more than 44 million registered learners. Last year, the company acquired substantially all the assets of edX, a world-leading online learning platform and education marketplace, to create one of the world’s most comprehensive free-to-degree online learning platforms. Piper Sandler analyst Arvind Ramnani believes TWOU’s EdX acquisition could help it lower its customer-acquisition costs and should benefit TWOU. However, he sees regulatory risks for the company.

Ramnani downgraded the stock to underweight from neutral last month, citing “multiple headwinds facing the industry and business model.” He noted the regulatory risk associated with the company’s revenue-share agreements, the possibility of digital-learning fatigue, and the possibility of TWOU’s university partners insourcing the management of online programs.

The stock retreated after the downgrade. TWOU shares have slumped 73.4% in price over the past year and 51.6% year-to-date to close the last trading session at $9.71.

Here is what could shape TWOU’s performance in the near term:

Bleak Bottom Line

For its fiscal first quarter ended March 31, 2022, TWOU’s revenues increased 9% year-over-year to $253.33 million. However, its loss from operations increased 199.9% from its year-ago value to $111.37 million. The company’s adjusted net loss came in at $18.46 million, reflecting a 115.2% increase from the prior-year quarter. Its adjusted net loss per share grew 100% year-over-year to $0.24. Moreover, its adjusted EBITDA declined 10.7% year-over-year to $12.28 million, while its cash, cash equivalents, and restricted cash balance stood at $233.60 million, down 53.7% from the year-ago value.

Mixed Profitability

TWOU’s 71.46% gross profit margin is 97.5% higher than the 36.18% industry average, while its 5.40% levered FCF margin is 49.8% higher than the 3.60% industry average. However, its negative 28.45% net income margin is significantly lower than the 6.66% industry average.

Also, its negative 35.17%, 13.27%, and 6.61% respective ROE, ROA, and ROTC, compare with the 17.78%, 6.05%, and 7.45% industry averages.

Mixed Valuation

In terms of forward EV/Sales, TWOU is currently trading at 1.41x, which is 28.4% higher than the 1.10x industry average. Also, its 17.83 forward EV/EBITDA ratio is 104.8% higher than the 8.71 industry average.

However, TWOU’s 25.1% forward Price/Sales is lower than the 0.94x industry average, and its 45.2% forward Price/Book is lower than the 2.49x industry average.

POWR Ratings Reflect Uncertainty

TWOU has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of C for Value, which is consistent with its mixed valuation.

TWOU also has a C grade for Quality, in sync with its mixed profitability.

Of the 23 stocks in the Software – SAAS industry, TWOU is ranked #15.

Beyond what I have stated above, one can also view TWOU’s grades for Sentiment, Growth, Momentum, and Stability here.

View the top-rated stocks in the Software – SAAS industry here.

Click here to check out our Software Industry Report for 2022

Bottom Line

The company projected 13% revenue growth year-over-year for the fiscal year 2022, but its net loss is expected to range from $260 million to $240 million. Also, the Street expects TWOU’s EPS to decline 86% year-over-year in the current quarter and to remain negative this year. Also, potential regulatory headwinds could make investors reluctant to buy shares of TWOU. So, I think it could be wise to wait for its prospects to stabilize before investing in the stock.

How Does 2U, Inc. (TWOU) Stack Up Against its Peers?

While TWOU has an overall POWR Rating of C, one might want to consider taking a look at its industry peers, The Sage Group plc (SGPYY), Informatica Inc. (INFA), and MiX Telematics Ltd. (MIXT), which have a B (Buy) rating.

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TWOU shares fell $0.25 (-2.57%) in premarket trading Friday. Year-to-date, TWOU has declined -51.62%, versus a -11.85% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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