Is 2U Inc for you? $TWOU

aside: please comment at the r/investing post, thanks.

Everything's online nowadays, even all university courses! And $TWOU is helping the best educational institutions be tech savvy and online.

So what did we learn about 2U?

Key Stats

Ticker TWOU
Sector Other IT Services & Consulting
Latest price $59.32
Value $3,051M
Daily vol $22M
Date 17 October 2017
Financials SEC Financials

1. What's 2U do?

2U, Inc. is a provider of an integrated solution consisting of cloud-based software-as-a-service (SaaS) combined with technology-enabled services (together, the Platform) that allows colleges and universities to deliver online degree programs.

The Company's SaaS technology consists of a learning environment (Online Campus), which acts as the hub for all student and faculty academic and social interaction, and a suite of integrated applications, which the Company uses to launch, operate and support the Company's clients' programs.

Northwestern, Yale, Berkeley, Georgetown, Vanderbilt, etc etc. There are a lot of impressive brands in their network!

2. Looking thro' the numbers

So for as long as I've seen, the business has been growing nicely, but losing money. In fact, I'm delighted to see that Wall Street expects the sales to acelerate, but it doesn't feel like it's on the way to the moon.

Metric 2012A 2013A 2014A 2015A 2016A 2017E 2018E
Revenue $56m $83m $110m $150m $206m $285m $390m
EPS $-3.33 $-3.81 $-0.91 $-0.63 $-0.44 $-0.12 $-0.07

And if I look at the bottom line, the management team is delighted to talk about EBITDA, banker speak for operational cashflow… but if you look at that, you'll miss that they capitalized technology and content development costs. i.e. they don't put some of their cash costs through the P&L, including salaries. 😦

What's the background?

Best I copy the language from the 10-K

We develop content on a course-by-course basis in conjunction with the faculty for each client program. The clients and their faculty generally provide course outlines in the form of the curriculum, required textbooks, case studies and other reading materials, as well as presentations that are typically used in the on-campus setting. We are then responsible for, and incur all of the expenses related to, the conversion of the materials provided by each client into a format suitable for delivery through our cloud-based technology.

And they say the useful life of these courses is circa 5 years. What? University courses will only be updated every 5 years? I'd have thought they require constant updating.

Any cash or dividends?

Yes, there's a cash balance, $22M at the end of the last quarter, that is the equivalent of 1% of the market value. Though a recent share sale will have swelled their coffers. And no, there is no sign of a dividend.

3. Any competition

They highlight two competitors, both of which got bought by some of the sector's behemoths.

Several competitors provide solutions that compete with some of the capabilities of our solutions. Two such competitors, EmbanetCompass and Deltak, were acquired in 2012 by Pearson and John Wiley & Sons, respectively, both of which are large education and publishing companies. There are also several private companies, including HotChalk and Everspring Partners, providing some or all of the services we provide, and these companies may choose to pursue some of the institutions we target. In addition, nonprofit colleges and universities may elect to continue using or develop their own online learning solutions in-house.

Net net, it's hard to find a good peer list. So I'm adding the publishers and the colleges to the roll.

Companies Latest Sales Operating Profit Return on Equity
2U Inc $239M -5% -13%
John Wiley & Sons Inc $1,726M 20% 9%
Pearson PLC (ADR) $6,270M 12% -41%
Houghton Mifflin Harcourt Co $1,390M 12% -31%
K12 Inc. $889M 10% 0%
American Public Education, Inc. $300M 19% 6%
Capella Education Company $439M 20% 20%
Adtalem Global Education Inc $1,810M 20% 8%
Bridgepoint Education Inc $510M 6% -3%
Career Education Corp. $631M -3% -6%
Grand Canyon Education Inc $922M 34% 22%
Strayer Education Inc $449M 17% 19%
Laureate Education Inc $4,239M 15% N/A

So when I get to valuation, I find myself struggling. How can this business have the same market cap as JWiley, more than K12 & HMH together, or half the value of Pearson.

It's even worth more than what Appollo paid to take McGraw Hill private. The folks that bought the University of Phoenix!

Peers Valuation Forecast PE Long-term Growth Dividend Yield FCF Yield
TWOU.O $3,051M -509x N/A 0% N/A
JWA $3,011M 17x 15% 2% 9%
PSO $6,777M 12x -7% 7% N/A
HMHC.O $1,406M -7x 5% 0% 1%
LRN $713M 36x 15% 0% 11%
APEI.O $335M 20x -15% 0% 10%
CPLA.O $810M 20x 9% 2% 10%
ATGE.K $2,215M 13x N/A 1% 10%
BPI $281M 15x N/A 0% 1%
CECO.O $753M 61x N/A 0% N/A
LOPE.O $4,295M 23x 16% 0% 5%
STRA.O $994M 27x 1% 1% 6%
LAUR.O $2,665M -16x -25% 0% 10%

I've not the energy to do an net present value guestimate. It just seems bonkers. Sure if it's a software "SaaS" play, it's worth a big multiple as it'll have leverage and a moat… but if they are writing courses univerity by university, then isn't it really a consulting business? With little operational leverage?

And one last thing…they recently paid $103m for GetSmarter, which does short online courses, a biz that did $17m sales in 2016. If I apply that to 2016 figures…I get $1.2bn of value versus the current $3bn.

4. Wall Street thinks it's a Buy!

Even if I don't get it, the professionals on Wall Street do. They say Buy and have a $63.56 target for the stock, thouh implies a rather unexciting upside of 7%.

Now, they've beaten earnings for the last 10 quarters which is great, but given the multi-year contracts… surely they have a really good visibility on their numbers?

5. I've learnt nothing 😦

I don't get it. Suggest you look at the Analyst Day Presentation too. Love to know if you are a buyer after those 129 pages!

I took particular issue with the idea of Cohort Margin. So they are EBITDA break-even on a a course in year 3. Does that mean before the capitalized costs of writing the courses?

I can't square the circle. Sorry.

View the archive of Stock a Day posts at it's subreddit stockaday. Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.

Submitted October 17, 2017 at 04:13PM by shane_stockflare

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