What happened

Shares of 2U (NASDAQ:TWOU) plummeted 66% in July, according to data from S&P Global Market Intelligence, after the online-education platform specialist told investors it was fundamentally changing its growth trajectory.

In fact, virtually all of 2U's plunge last month came on the final day of July, which happened to be the first trading day after its second-quarter 2019 report hit the wires. But the report itself wasn't technically bad: Revenue climbed 39.1% year over year, to $135.5 million, translating to an adjusted net loss of $25.8 million, or $0.43 per share. By comparison, 2U's own guidance called for a narrower net loss of $0.35 to $0.36 per share on revenue closer to $125 million.

Student is sitting next to a window and studying on a laptop computer.


So what

But 2U CEO Chip Paucek also told investors the company has decided to set the company "on a defined path to profitability by tempering short-term growth projections and leveraging our scale to drive greater operational efficiencies across the business."

So what's the problem? Paucek elaborated during the subsequent conference call that 2U is lowering its average enrollment expectations for its core graduate program business, particularly as a growing number of competitive solutions crop up and give students new options to pursue online education.

Now what

Paucek also said 2U will slow the pace of its new graduate program launches for the next two years. He didn't offer specifics to that end, instead promising more details when the company holds its upcoming Investor Day on Nov. 6, 2019. But he did suggest the number of new program launches will be "substantially fewer [...], probably less than half" of the 21 launches it was previously targeting.

Considering 2U's business has yet to achieve sustained profitability -- it relies on shouldering the bulk of program launch expenses in exchange for most of the tuition revenue over the course of its long contracts -- this might well be the best path forward for 2U to maximize its profitability and predictably generate value for shareholders. And thanks to its acquisitions of short-course specialist GetSmarter (in 2017) and tech "boot camp" leader Trilogy Edication (earlier this year), the company can also employ those two sources for potentially lucrative incremental growth.

Until investors have more visibility into 2U's new growth plans, I think the stock will remain depressed.

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.