2U (TWOU +0.00%) stock has more than doubled over the past 12 months as the education technology company, which helps colleges and universities provide online degree programs, generated robust growth throughout the pandemic. But is it a worthy long-term investment?
How does 2U make money?
Founded in 2008, 2U enjoyed an early-mover's advantage in its market. After signing its first contract with the University of Southern California in 2009, other major universities such as Georgetown, Syracuse, Northwestern, UC Berkeley, and Yale followed suit.
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The company splits its business into two main segments. Its Degree Program business, which generated 63% of its revenue in 2020, provides both undergraduate and graduate degrees online. The business only started offering undergraduate degrees in 2019.
Its Alternative Credential business, which generated the remaining 37% of its revenue, offers technical certifications for a wide range of subjects, including coding, cybersecurity, digital marketing, and supply chain management.
It built this newer business atop two acquisitions: the short course development company GetSmarter in 2017 and the IT boot camp company Trilogy Education Services in 2019. 2U gradually expanded this segment to reduce its dependence on pricey and rigid university partnerships.
How fast is 2U growing?
2U generated impressive top-line growth prior to the pandemic. Its revenue rose 39% in 2017, another 44% in 2018, and 40% to $574.7 million in 2019.
Adjusted net losses narrowed in 2017 and 2018, but they widened significantly from $3.5 million in 2018 to $71.9 million the following year. Management attributed that massive loss to the rising costs needed to gain more students, and its stock lost more than half its value throughout the year.
In 2020, revenue rose 35% to $774.5 million with 17% growth in Degree Programs and 83% growth in Alternative Credentials as its adjusted net loss narrowed to $63.7 million.
2U ended the year with positive adjusted EBITDA of $16.1 million, compared to a loss of $23.9 million the prior year. On a GAAP basis, net losses narrowed from $235.2 million to $216.5 million.
It attributed those bottom-line improvements to two main factors. First, the Degree segment's profit margin expanded as its marketing efficiency improved and its mature programs generated strong growth throughout the pandemic. Second, even though the profit margin for its Alternative Credentials segment stayed negative, it improved year over year as the company launched new courses and integrated Trilogy's IT boot camps.
2U expects its revenue to rise 17% to 22% in 2021 with a shrinking net loss of $185 to $165 million. Management also expects adjusted EBITDA to surge 180% to 304% to an all-time high of $45 million to $65 million.
A bumpy road ahead
Based on management's expectations, 2U stock trades at about four times this year's sales, which makes it fairly cheap relative to its growth.
However, the company's deals with universities aren't exclusive, and it still faces a long list of competitors, including Coursera in online university degrees, Udemy in technical certifications, and Microsoft's LinkedIn Learning in casual online courses. University enrollment rates have also declined sharply throughout the pandemic, even as schools scramble to offer more online courses.
Those headwinds could squeeze 2U's margins again and make it more difficult for the company to generate consistent profits.
Is 2U worth buying?
2U's business model is innovative and disruptive, but its fundamentals aren't sound enough to justify an investment right now. Its revenue growth is decelerating; it's deeply unprofitable; and it simply faces too many near-term headwinds.
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.
