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Why 2U, Inc. Stock Surged 53.6% in May

By Billy Duberstein – Jun 3, 2020 at 2:00PM

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The online education company got a boost from the shift to remote learning amid COVID-19.

What happened

Shares of 2U, Inc. (TWOU 2.03%) rose 53.6% during the month of May, according to data from S&P Global Market Intelligence. The online education technology provider posted better-than-expected results for the first quarter on April 30, which set up strong gains for the month of May as the market also continued to recover.

So what

In its first quarter earnings report, 2U posted an eye-opening 43.6% revenue growth and adjusted (non-GAAP) loss per share of ($0.33), with both figures ahead of expectations. Aside from the effect of last year's acquisition of Trilogy, organic revenue growth was only 15%, but that marked an acceleration over the fourth quarter's 13% organic growth, showing that even the effect of two weeks of quarantines boosted 2U's online education business. While 2U is still not profitable, free cash flow margins have improved mightily over the past two quarters, going from (19%) in Q3 2019 to (14%) in Q4 2019 and then jumping to (9%) in Q1 2020.

A young student looks at her laptop screen where a teacher teaches a class virtually.

Image source: Getty Images.

The positive results, as well as positive channel checks, led some analysts to hike their price targets for 2U later in the month. Clearly, with COVID-19 still out there, many universities are going to continue their online-only programs at least through the fall, and perhaps longer. 

Now what

2U's earnings beat probably wasn't enough to justify such a large gain in May. More likely, investors are now anticipating a bigger secular and lasting shift to online alternatives, with 2U being one of the largest players.

A recent HolonIQ survey pointed to a massive surge on respondents who said they expect disruption in the higher education market within the next 24 months. That's a sharp contrast from September, when most thought higher education disruption wouldn't occur until 2025. By 2025, online education is expected to grow to $74 billion, up from just $30 billion today. With only $627 million in trailing 12-month revenue, 2U should continue to benefit from this market's growth as long as those trends of online education continue to accelerate.

Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends 2U. The Motley Fool has a disclosure policy.

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