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Why 2U, Inc. Stock Plunged Today

By Steve Symington – Nov 6, 2018 at 5:20PM

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Wall Street must be grading on a strange curve, because the online education platform provider is falling despite an A+ quarter.

What happened

Shares of 2U Inc. (TWOU -3.18%) were down 18.6% as of 3:45 p.m. EST Tuesday in spite of strong quarterly results from the online education platform leader.

To be sure, late yesterday 2U told investors its third-quarter 2018 revenue climbed 52.2% year over year to $107 million, near the high end of its latest guidance for a range of $106 million to $107 million. On the bottom line, that translated to an adjusted net loss of $688,000, or a penny per share, better than its outlook for a per-share loss in the range of $0.03 to $0.02.

Man with glasses and a flannel shirt working on a notebook computer

IMAGE SOURCE: GETTY IMAGES

So what

The company also generated adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $4.7 million this quarter, near the high end of its expected $4.2 million to $4.8 million range.

"Strong year-over-year growth combined with our stepped-up program launch targets for 2019, 2020 and 2021, have put 2U on the path to $1.0 billion in revenue, which we expect to hit in a little over three years," added 2U co-founder and CEO Chip Paucek. "Higher education is fully embracing the power of online, and 2U's size, scale, and track record put us in the pole position to seize new growth opportunities and further solidify our market leadership globally."

Now what

What's more, 2U is now targeting 2018 revenue ranging from $411 million to $411.9 million, with an adjusted net loss per share of $0.09 to $0.08. Both ranges were revised to the high ends of its previous expectations.

If that weren't enough, 2U provided preliminary guidance for 2019 revenue growth of 32.5% to 33.9%, or to roughly $548 million from the midpoint of its new 2018 range. That figure was in line with consensus predictions. The company further called for an adjusted EBITDA margin of between 2% and 2.5% for next year.

So why the decline? For one, shares of 2U don't exactly look cheap trading at roughly nine times trailing 12-month sales -- though I would personally argue that's a fair premium given its outstanding growth rates and improving profitability.

Investors should also note that 2U stock is historically volatile. Shares endured a similar unusual drop, for example, immediately after its equally impressive second-quarter report in August, only to quickly recoup those losses to rise more than 18% that month. Then 2U just as quickly pulled back in September following some cautious words from an analyst regarding its "rich" valuation.

In the end, while it's certainly no fun for optimistic investors to witness a seemingly unjustifiable drop, that's why I think patient investors should continue to focus on 2U's enviable long-term potential.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends 2U. The Motley Fool has a disclosure policy.

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