Cloud-based education platform 2U (NASDAQ:TWOU) went public on March 28 on the NASDAQ Global Market. Founded in 2008, the company partners with top-tier colleges and universities to provide popular online programs through a cloud-based software-as-a-service platform. The company offered 9.2 million shares through its initial public offering, and it achieved a market capitalization above $500 million in its first trading day.
Colleges and universities are aware of the advantages of online learning, and in the past few years they have continued to use more technology to provide their services. As a provider of cloud-based solutions that enable educational institutions to deliver education to qualified students anywhere, 2U could benefit enormously from this significant transition in the higher education industry. What's next for 2U after its IPO?
Since its foundation 2U has benefited from the increasing demand for cloud-based educational services, and it has raised almost $100 million in venture funds so far. 2U has also managed to increase its top line steadily from $29.7 million in 2011 to $83.1 million in 2013. In terms of profitability, the company is still not making money as it reported a net loss of $28 million last year.
2U isn't a traditional for-profit educational company as it does not provide any degrees. Instead, 2U sells its software to universities, which allows them to host online classes. This business model has several advantages. The company does not have to invest money and time to create educational content. Furthermore, it seems like it signs long-term contracts with its customers.
According to Business Insider, the company asks the university to sign agreements that will last for 10 and even 15 years. Because clients will also need training to use a platform, 2U's clients have few incentives to switch platforms. This allows 2U to enjoy recurrent revenue and stability.
Despite the various advantages that come with developing a proprietary, cloud-based platform for educational services, 2U's business faces several risks. First, as the company does not own educational content, it depends heavily on colleges and universities adopting online course delivery. These institutions may stop strengthening online platforms for several reasons, such as the low retention rates seen in online courses.
According to Coursera, a for-profit start-up that offers massive open online courses, only 7% to 9% of students who sign up for an online course on Coursera's platform actually finish the class. The company also incurs significant expenses in connection with the launch of new client programs. Finally, the company still does not have enough customers for profitability.
Cloud and education are an interesting combination
Like 2U, several companies have started to offer technology-based learning solutions. These include Cornerstone OnDemand (NASDAQ:CSOD), which provides a learning cloud for companies that want to train their employees to use software from Salesforce.com. Shares of Cornerstone OnDemand have appreciated massively since the company's 2011 IPO as the company benefited from the increasing demand for training related to Salesforce's products. The company's learning application was developed natively on the Salesforce platform, and it allows clients to enjoy just-in-time training.
Note that, unlike 2U, Cornerstone OnDemand does not work together with universities. The company's most important partner by far is Salesforce, which allows CornerStone OnDemand to offer training programs that can be tailored and delivered directly via Salesforce's platform.
Final Foolish takeaway
As an early mover in the online education field, 2U faces a great market opportunity ahead because of the fast-increasing demand for digital-learning content. The company nearly tripled its top line between 2011 and 2013. That said, it's important to keep in mind that the company also faces several challenges ahead, such as its high dependence on a few universities and the increasing competition. Moreover, 2U is not making money, but this situation could change in the middle run as the company partners with more universities in order to reduce the effect of its high fixed costs on its profitability.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.