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Why 2U Stock Plunged Today

By Steve Symington - Jul 31, 2019 at 3:20PM

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The specialist in online education platforms is sharply reducing the pace of new program launches. Here's why.

What happened

Shares of 2U ( TWOU 5.21% ) were down a harrowing 66.2% as of 3 p.m. EDT Wednesday. The online-education platform company delivered mixed second-quarter results, then reduced the full-year outlook for its core business, and moderated plans for future graduate-program launches.

On the former, 2U's quarterly revenue climbed 39.1% year over year to $135.5 million, translating to a non-GAAP (adjusted) net loss of $25.8 million, or $0.43 per share. By comparison -- and though we don't normally pay close attention to Wall Street's demands -- most analysts were modeling a narrower loss of $0.35 per share on roughly the same revenue.

Man in suit watching red arrow crash through concrete floor.

Image source: Getty Images.

So what

Noting that the company recently closed on its $750 million acquisition of tech "boot camp" company Trilogy Education, 2U co-founder and CEO Chip Paucek argued that the "business is evolving to better meet marketplace demand and the transforming needs of our university partners and lifelong leaders."

But more concerning was his elaboration: "As we deliver our full portfolio of educational offerings to new and existing partners, we are also setting 2U on a defined path to profitability by tempering short-term growth projections and leveraging our scale to drive greater operational efficiencies across the business."

During 2U's earnings conference call, Paucek explained that the company is enduring an "evolving market dynamic [that] creates some short-term pressure," particularly with more competition from regional online-education platform providers. This necessitates an expectation for smaller programs and a slower program launch cadence.

Now what

To start, 2U is substantially reducing its planned program launches for both 2020 and 2021. Paucek declined to provide specifics -- instead promising more detail at the company's upcoming Investor Day in November -- but he did suggest the specific number will "probably" be less than half its previous targets.

"To be clear, what we're doing here is proactively adjusting the velocity of new program launches to support our path to profitability and positive free cash flow," Paucek said. "This will allow us to shift more focus to optimizing the performance of our existing programs while we continue to add programs, but at a smaller rate."

In the end, today's drop might well be a terrible overreaction assuming 2U's longer-term story remains intact. But it's hard to blame some investors for fleeing, given the uncertainty created by this massive strategic shift.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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